“The idea behind the concept of space filling is simple and intuitive.”
-Geoffrey West
The idea behind the rate of change relationship between Growth & Inflation and market returns is also simple and intuitive (especially after the rate of change data is reported and market moves have been made).
Prior to the economic data being reported, markets discount the “news.” You can think of markets either melting up or crashing downward into that “news” as space filling too. All we have between now and the next data point is time and space.
As Geoffrey West goes on to explain in Scale, space filling “means that the tentacles of the network have to extend everywhere throughout the system that it is serving.” (pg 112)
Back to the Global Macro Grind…
As everyone who is apolitical and data dependent knows, Asian and European economic data has been slowing for all of 2018, and many of their major stock market indices have ultimately crashed in kind.
When a stock market drops by 20% or more, we call that a crash. If you disagree with the verbiage, try it with your own money and let me know what it’s called. If you lose 20% of your money, you need to be up +25% (from that price) to get back to break-even.
As of yesterday’s US stock market close, the Russell 2000 (-20.8% since AUG 31st) has joined the Chinese, South Korean, Italian, etc. stock market crashes of 2018. If you bought Russell (IWM) then, you have to be up +26.5% (from here) to get back to break-even.
But don’t worry, it finally signaled immediate-term TRADE #oversold yesterday.
Not to be confused with the next “globally synchronized recovery” that was perpetuated by A) the largest monetary stimulus in the history of China, B) a 6-year cyclical peak in a European expansion and C) late cycle and pro-cyclical US Tax Reform…
An immediate-term #oversold TRADE @Hedgeye is not the beginning of the next Bullish Intermediate-term @Hedgeye TREND! All Mr. Market did yesterday was fill-in the space that economic gravity supported.
Economic gravity? You know, the data. It matters more than any political narrative or Old Wall “year-end rally” pitch. While we know PMs will be begging from their knees for the Fed to bail them out of the risks associated with it, The Cycle trumps all tweets.
Here’s the non-fake-news update on that Global Economic Cycle:
1. USA
A) US Retail Sales #slowed -60 basis points to +4.2% y/y in NOV
B) US Import Prices #slowed -260 basis points to +0.7% y/y in NOV – that’s a 26 month low!
C) That takes our nowcast for headline q/q SAAR US GDP Growth to +1.38% for Q4 of 2018
2. CHINA
A) Chinese Retail Sales #slowed to +8.1% y/y in NOV – that’s a 15 YEAR low
B) Chinese Industrial Production #slowed to +5.4% y/y in NOV – that’s a 10 YEAR low
C) Xi will have his boys make up the headline GDP number for Q4, so who cares what he says it is
3. EUROPE
A) Germany DEC Composite PMI (-0.1pts to a cycle-low of 52.2)
B) France DEC Composite PMI (-4.9pts to a cycle-low of 49.3)
C) Eurozone DEC Composite PMI (-1.4pts to a cycle-low of 51.3)
Unlike the political narrative that the USA was going to see raging levels of import price inflation due to the “Trump tariffs”, read what the data is one more time – it’s a 26 month low! Why? A: Math. The answer is simple and intuitive: #StrongDollar.
So the Fed is tightening into a Global Economic Slowdown with the US economy only recently rolling off its economic cycle peak? Yep. Do you think Powell should panic and/or pander to the political hopes of his Tweeter in Chief?
Who cares? The UST 10yr Yield is down another -4 basis points to 2.82% this morning and is down -25 basis points in the last month alone. If you got The Cycle right, you got your asset allocation right. You sold GROWTH and bought SAFETY in September.
Pretty simple and intuitive. Just like covering some Tech (XLK), Energy (XLE), and Industrial (XLI) shorts this morning and buying some #GrowthSlowing Bond Proxies like Utilities (XLU) should be. Our process simply buys and covers on crashing #oversold signals.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.79-2.98% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 54.27-57.50 (bullish)
Industrials (XLI) 65.03-69.99 (bearish)
VIX 19.39-25.55 (bullish)
USD 96.25-97.55 (bullish)
Oil (WTI) 47.77-53.39 (bearish)
Gold 1 (bullish)
Copper 2.68-2.80 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
