“Without fallibility there would be no reflexivity.”
-George Soros
If the Macro Tourist consensus of a “globally synchronized recovery”, “overweight EM”, “bearish USD”, and something political about Trump hasn’t rendered itself profitless in 2018, I don’t know what has.
We’re all fallible, but we don’t have to be ignorant to readily available rate of change data. The aforementioned quote comes from what I thought was the best chapter in The End of Theory by Richard Bookstaber – he called it Radical Uncertainty and cited Soros, often.
“Soros’ fallibility principle is that an individual’s perspective is bound to be either biased or inconsistent or both… and it’s tied together like Siamese twins with reflexivity, but fallibility is the firstborn.” (pg 59)
Back to the Global Macro Grind…
While there are plenty of reflexive realities that become readily obvious after big market moves, a trending rate of change slow-down in GROWTH is the firstborn causal factor that leads to a myriad of risks for both companies and countries alike.
Why do I measure and map country-level FX, Credit, and Equity risk that way? As a former buysider that’s how I modeled companies. The #1 way to get paid as a short seller of an “expensive” growth stock is to time #GrowthSlowing and margin compression right.
After a record 8 straight quarters of being in pro-growth Quads 1 and/or Quad 2, why was the buy-side loaded long of Brazilian Currency, Credit, and Equity risk as Brazil moved into #GrowthSlowing Quads 3 and 4 this year?
It’s called anchoring. After 2 straight years of growth accelerating, what could possibly go wrong?
How about South Africa? It entered Quad 4 (growth and inflation slowing at the same time) in Q1 of 2018. Argentina? It entered Quad 3 (economic stagflation) in Q1 of 2018. China? It’s economy has been oscillating between Quads 3 and 4 since Q1 of 2018 as well.
And when did the returns for EM, China, etc. peak and start to roll?
A: JAN (Q1) of 2018
So why don’t more money managers use our 4 Quadrant GIP Model (Growth, Inflation, Policy) model? Who knows. But should you really care? I don’t wake up every morning trying to become a Nobel laureate. I just want to help you make and save money.
For those of you who are new to our GIP risk management process:
- Quads 1 and 2 are #GrowthAccelerating economic environments
- Quads 3 and 4 are #GrowthSlowing economic environments
Rather than trying to predict when a Canadian trade negotiator is going to appease the tweeter in chief, I humbly submit you’ll be more proactively prepared vs. Macro Tourists by reading this Canuck’s rants (or at least consider our cartoons?).
As opposed to opinions about politics and valuation, the rate of change data for both growth and inflation is fact.
So are the following 3-month (now trending) draw-downs and crashes in touristy portfolios:
- Brazilian Stocks (EWZ) down -4.6% yesterday and down -15.0% in the last 3 months
- South African Stocks (EZA) down -7.1% yesterday and down -21.9% in the last 3 months
- Turkish Stocks (TUR) down -1.6% yesterday and down -37.8% in the last 3 months
- Gold Mining Stocks (GDX) down -2.9% yesterday and down -19.1% in the last 3 months
- Soybeans (SOYB) down -0.2% yesterday and down -14.5% in the last 3 months
Is all of this a function of the “trade wars”? Ha!
Actually, that may not be funny to the guy or gal you forwarded this to who has been buying all of these exposures (throw in some “cheap European equity” exposure too, just for kicks) the whole way down this year. Losing other people’s money is not funny.
Btw, if the trade war is impacting the US in such a disastrous way, why did the USA’s ISM reading for AUG ramp to a new cycle high of 61.3 yesterday? Oh the cognitive dissonance of it all!
That ISM report was a tough one if you’ve been calling for the ISM to “top” for the last 2-3 years.
At the same time, it is hard to call it a “comeback” when New Orders have been running north of 60 for 16 consecutive months and for 19 of the last 20 (the best > 60 streak since 1973). Reminder: USA was in Quad 1 or 2 for a record 8 straight quarters in a row too.
In other Quad 3 or Quad 4 economic news this morning…
- Eurozone Business Confidence hit a 23-month low
- Eurozone Retail Sales #slowed to +1.1% y/y growth in JUL vs. an already #slowing rate of +1.2% in JUN
- Italian PMI #slowed to 51.7 in AUG vs. 53.0 in JUL
Oh, and this morning the Greek stock market officially moved into #crash mode, down 20.5% since… you guessed it – when the “globally synchronized recovery”… and Chinese, Brazilian, Turkish, etc. stocks… peaked in JAN of 2018.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.79-2.91% (bearish)
SPX 2 (bullish)
NASDAQ 7 (bullish)
DAX 12104-12531 (bearish)
VIX 11.50-13.93 (bearish)
USD 94.26-96.01 (bullish)
Gold 1182-1222 (bearish)
Copper 2.57-2.77 (bearish)
Corn 3.54-3.73 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
