“In retrospect it is astonishing that all of this insight had eluded the greatest mathematicians, physicists, and philosophers…”
-Geoffrey West
For thousands of years, that is! As West goes on to explain in Scale:
“Mathematicians had recognized for a long time that there were geometries that lay outside of the canonical boundaries of the classical Euclidean geometry that has formed the basics for math and physics since ancient times…”
“It fell to the French mathematician, Benoit Mandelbrot, to make the crucial insight that, quite to the contrary, crinkliness, discontinuity, roughness, and self-similarity – in a word, fractality – are in fact ubiquitous features of the complex world we live in.” (pg 130)
Back to the Global Macro Grind…
After a US record 9 STRAIGHT quarters of year-over-year US GDP #GrowthAccelerating (see Chart of The Day), a lot of people thought that US Growth stocks couldn’t crash from their 2018 #CyclePeaks… so, when The Cycle slowed, they did.
And after this recent market bounce, I keep bringing investors back to the context of comping that growth acceleration…
“Comping”, as in comparing against the prior acceleration in both GDP and revenue growth… can revenues accelerate further, despite GDP #slowing from its cycle peak?
Wall Street consensus called the companies that they thought wouldn’t be affected by The Cycle, “Secular Growers.”
“Secular”, as in long-term, with no religious or cyclical basis. Ha! To be fair there wasn’t really a religion associated with being long FANG, then adding another A, eh, when the Apple (AAPL) chart looked good. But there was, kind of.
You see, Snap Chat (SNAP) was supposed to be a potential Secular Grower (check out their numbers this morning), until the chart stopped looking good and the company looked more like an app. Are apps Secular Growers, or core shorts?
Is a Secular Grower just a cool growth company that hasn’t yet seen the fractal pattern of a cyclical slow-down? Oh Snap!
How many expert stock pickers of the FAANG and smid-cap cloud cyclical peak know what happened to what used to be called the cloud (the internet) stocks as The Economic Cycle peaked at +5.3% year-over-year GDP growth in Q2 of 2000?
Here’s a quick historical rewind on both peak GDP vs. “it’s different this time” Tech profits back then:
A) Year-over-year US GDP Growth:
- Q2 of 2000 = +5.3%
- Q3 of 2000 = +4.1%
- Q4 of 2000 = +3.0%
- Q1 of 2001 = +2.3%
- Q2 of 2001 = +1.1%
*note, from #PeakCycle in Q2 2000, every quarter GDP slowed
B) Year-over-year SP500 Tech Earnings Growth:
- Q2 of 2000 = +44%
- Q3 of 2000 = +40%
- Q4 of 2000 = +9%
- Q1 of 2001 = -32%
- Q2 of 2001 = -56%
*note, from #PeakCycle what EPS growth did as GDP slowed
But, but, “that was different because Tech didn’t have earnings like we have today.” The only truth about that statement is that Tech’s earnings had HIGHER growth rates at the peak than we had in Q2 of 2018 when SP500 Tech Earnings peaked at +32%.
Other major callouts for those who are still around from the lessons I learned watching my buy-side analyst peers implode buying what weren’t “dips in 2000-2001:
- You didn’t have to have a “recession” to lose at least 50-90% of your money
- As GDP went from +5% to +2%, Tech Earnings went from up +44% to down -32% year-over-year
- Tech Earnings didn’t go POSITIVE year-over-year until Q2 of 2002 when they comped against the -56% of Q201
Lesson: even if you’re not a “Secular Growth” bull and you’re long of God or something like that, respect the comps and The Cycle.
Bringing this back to 2018 #PeakCycle in Momentum, Tech, Small-Mid Cap Cloud, etc., we don’t have to apologize for making the call to go from LONG all of that to SHORT in SEP of 2018.
We don’t have to make excuses that we have to buy them on “valuation” now either…
In fact, for those of you who are new to our process and product (thanks for joining us by the way), what I used to say in 2016 and 2017 was ‘buy-the-damn-dip in the NASDAQ because it’s expensive.’
Oh do these forsaken comments about valuation ruffle the feathers of the fundamentalist. Oh snap, again! I’ll take the fractality of The Cycle and how it impacts the rates of change in growth, inflation, and profits over a valuation opinion all day long.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.57-2.80% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
VIX 17.15-29.58 (bullish)
AAPL 142.03-157.33 (bearish)
AMZN 1 (bearish)
FB 128-152 (bearish)
GOOGL 1029-1109 (bearish)
NFLX 273-370 (bullish)
TSLA 299-363 (bearish)
Bitcoin 3 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
