“Understand that people are wired very differently.”
-Ray Dalio
So an alleged trade truce between the USA and Europe is going to arrest the slow-down in the former “globally synchronized recovery” and launch China, Europe, and Emerging markets into the next globally synchronized melt-up, eh?
#Cool
Are you a buyer of the trade truce this morning or are you going to stay with your measuring and mapping #process of global growth and inflation? Is Trump going to sign a deal with Zuckerberg to re-accelerate revenue growth from the peak of the FB cycle too?
Back to the Global Macro Grind…
After doing 3 full days of meetings with Institutional Investors in Boston, MA I am 100% sure of one thing – the way we consistently and dispassionately contextualize the economic cycle is very different than what investors are talking about with the Old Wall.
Macro Tourism isn’t a joke – it’s how many people who do not have a data driven macro research process are wired to think. As one major bottom-up PM reminded us in Beantown, “when all of this Trump news is hitting the tape, we have to try to explain it somehow.”
But do you? I don’t.
When we went bearish on:
- #EuropeSlowing (2H 2017)
- #ChinaSlowing (JAN 2018)
- #EMSlowing (JAN 2018)
The words Trump, Trade, and/or Tariffs had 0% to do with us making those calls. Zero.
Our latest non Macro Tourist (consensus) view that US #InflationAccelerating is about to hit a cycle peak and slow has 0% to do with tariffs too. It has everything to do with what the data is most likely to look like against steepening multi-year base effects.
If you are new to our measuring and mapping process and you don’t yet understand “base effects”, every serious investor should. As we outline on slide 16 of the current Q3 Macro Themes deck, the Base Effects matter more now than they ever have:
- As the economy has gotten increasingly more reliant upon FINANCIAL LEVERAGE to replace a lost 300 basis points of organic growth potential…
- Both GROWTH and INFLATION have become decidedly more cyclical throughout the POST-CRISIS era and since COMMODITIES took off in the early 2000s, respectively
As you can see in the Chart of The Day, this is largely a demographic (demand) reality. It’s not an opinion. So if you think it’s Trump tweets that are making the global economic cycle go round, you should think about that all over again.
In the US specifically, 75% of the time the marginal rate of change in the 2-year average Real GDP growth rate in the comparative base effect period carries the OPPOSITE sign of the marginal rate of change of the GROWTH rate in our forecast period.
Again, you might have to re-read that sentence more times than you read Old Wall headline “news” to learn something useful that will evolve how you think about the economic cycle. Actually, I highly encourage you to study it.
Back to China, Europe, and EM (Emerging Markets) #slowing, the #1 reason why these economies are slowing is steepening base effects:
- China’s steepening base effects were born out of the BIGGEST monetary stimulus in the HISTORY of China in 2016-2017
- Europe (especially export beneficiaries like Germany) is coming off a 6 YEAR HIGH in its GDP growth cycle
- EM was in what we call Quad 1 (real growth accelerating as inflation slowed) for a record 8 QUARTERS in a row
I realize you don’t hear that on CNBC every day. That’s why you pay for this and get that for free. You also pay us (and I sincerely thank you for that) to help you risk manage where Macro Tourists and their consensus is going to be completely off-side next.
The Top 3 Things we think Consensus Macro will eventually have wrong in 2018 are:
- The “Globally Synchronized Recovery”
- Weak Dollar vs. Strong Euro and Strong EM Currencies
- Rising Interest Rates (beyond the highs we’ve already seen)
It’s already 7 months into the 2018 and 2 of those 3 things have already manifested. We don’t have a “globally synchronized recovery”, we have #GlobalDivergences – and we don’t have a weak Dollar; we have a strong and strengthening one.
Give this another 3-6 months…
If and when long-term US Treasury Yields start to break-down (like European ones did after European cyclical inflation peaked and started to slow in 2H 2017), we think our entire profession we be risk managing Global Deflation (not inflation) again.
And, heck, maybe the Macro Tourists who are hook-line-and-sinker biting on this “trade truce” this morning might just have to blame Trump signing deflationary global free-trade deals for that!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.80-2.99% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Industrials (XLI) 73.02-75.85 (bearish)
VIX 11.80-14.50 (bearish)
USD 93.75-95.11 (bullish)
EUR/USD 1.15-1.17 (bearish)
Oil (WTI) 66.44-70.48 (bullish)
Copper 2.70-2.84 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
