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“Who really owes what to whom?” -David Graeber 

When it comes to government money printing and central market planning, that’s a good question. It’s obviously not a new one. But it is one that matters more and more when you go from a “globally synchronized recovery” into Global #GrowthSlowing

As many of you economic and history buffs know, David Graeber wrote that thick red book in your library that he called DebtThe First 5,000 years. “What does it mean when we reduce moral obligations to debts? What changes when one turns into the other?” (pg 13) 

Again, more good questions, especially if your timing is right. Most “credit” analysts on Wall Street who are a decade or more younger than me haven’t seen a credit cycle in their boss’ book yet, don’t forget. That’s not a knock or stereotype – that’s just a cyclical fact. 

Back to the Global Macro Grind… 

Will there ever be a Credit Cycle (spreads blowing out) again? Of course there will be. As most things “risk on” on Wall Street go, at first it will start to happen slowly, then it will happen all at once. 

#ChinaSlowing, Reiterated - The Cycle cartoon 05.12.2016

What would be a big catalyst for a Credit Cycle (*hint, The Cycle #slowing)? I can tell you what the catalyst wasn’t: 

A) The USA being in a record 8 straight quarters of year-over-year growth #accelerating, which started with
B) The Shanghai Accord of 2016 …
C) And Zero Edge articles generating ‘end of the world’ click-bait all the while 

On A), anyone with an 11th grade education (who wasn’t bearish on US Growth for the last 1-2 years) can readily show you the 8 consecutive quarters of economic growth accelerating. 

On B), The Shanghai Accord, is now 2.5 years old and it warrants a refresher. 

As you can see in our Chart of The Day, the art of the deal was very straightforward: 

  1. The Fed rhetorically eased significantly into the lows of the 2015-2016 Industrial Recession
  2. Which allowed the Chinese to unleash a wave of liquidity never seen to man, woman, or child 

Did the largest central market planning event in Chinese history matter to the subsequent “globally synchronized recovery?” Uh… yes. Big time. And that, my data-dependent-rate-of-change friends, is why we have #GlobalDivergences (slowing) in 2018. 

I know. I know. It’s really super tremendously hard to believe this doesn’t all have to do with Trump and tariffs. But, in the words of your favorite political person, “believe me.” The year-over-year comps (or base effects) associated with: 

  1. The Shanghai Accord and
  2. US Tax Reform 

Are going to be the hardest economic growth comparisons to lap since 2007-2008. That’s one of the main reasons why I’ve started to make all of the pivots I’ve been making from both an asset allocation and sub-sector exposure perspective. 

I don’t get paid to miss the economic cycle rolling over from its cycle peak. 

Q: “But, but, what if Trump does this or Xi does that?” (heard in every meeting for the last 2 weeks in both Boston and NYC)
A: I don’t know, but what if whatever they do can’t comp the comps? 

What I do know is that I have the unalienable freedom to change my mind if either the economic data or my market signals change. And the real-time update on that is that they haven’t. 

Despite the Chinese panicking (devaluing the Yuan by 4% doesn’t just happen), the Chinese stock market moved right back into #crash mode this morning, dropping another -1.8% to -21% since it peaked when “globally synchronized recovery” expectations did in January. 

Fundamentally, here’s the latest Chinese data update that Darius Dale published to our premium paying fellow data dependents @Hedgeye yesterday: 

China, Asia Still Slowing: Q: What do you get when Chinese policymakers openly freak out about their ongoing growth slowdown? A: A largely ineffective easing of monetary and fiscal policy – for now at least. Specifically, China’s JUL PMI data showed ongoing sequential and trending deceleration across the Manufacturing, Services and Composite readings and is confirming of our view that the Chinese economic impulse is likely to remain negative throughout 2H18E. 

We’re seeing that negative impulse continue to weigh on Asian economic growth, with South Korean Industrial Production growth turning negative in JUN (-0.4% YoY) and its AUG Manufacturing and Non-Manufacturing Business Sentiment slowing to new lows, levels last seen since the start of 2017. 

All told, we are keen to reiterate our view that until the #OldChina economy laps peak comparative base effects in the 3Q18E-1Q19E timeframe, it is likely to remain a drag on global growth – though perhaps a slightly less of a drag to the extent the recent spate of policy easing kicks in, at the margins. A drag is still a drag, however, and no one is long of global Industrials on that [weak] thesis. 

Yeah, Double D, tell me what you really think. This actual economic rate-of-change news was published nowhere in mainstream media yesterday. Thank goodness for that. Having an information edge in a world loaded with political spin has never been so valuable. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now: 

UST 10yr Yield 2.84-3.03% (neutral)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Utilities (XLU) 51.80—53.11 (bullish)
REITS (VNQ) 80.09-82.23 (bullish)
Industrials (XLI) 73.06-77.15 (bearish)
VIX 11.65-14.38 (bullish)
USD 93.80-95.10 (bullish)
EUR/USD 1.15-1.17 (bearish)
Oil (WTI) 67.26-70.20 (bullish)
Gold 1 (bearish)
Copper 2.69-2.86 (bearish)
Bitcoin 7 (neutral) 

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

#ChinaSlowing, Reiterated - Chart of the Day