“Cycles’ clout is heightened by the inability of investors to remember the past.”
-Howard Marks 

Is the next US economic growth #acceleration and bull market going to be born out of a bunch of US government deals? Here’s the latest deal: no government shutdown. Awesome, eh? And didn’t you hear? We’re getting a tremendous China “deal” next! 

The most important thing about all these allegedly phenomenally excellent deals is that they have to compare against The Cycle.

You know, the record 9 straight quarters of US economic growth accelerating (ended SEP of 2018), Germany in the 94th percentile of historical GDP readings since WWII, and the biggest monetary stimulus in the history of China (2016-2017)…

Back to the Global Macro Grind… 

Here's The Deal! - z 01.30.2019 cycle cartoon

I spent all day meeting with Institutional Investors in NYC yesterday and came away with the same takeaway I had in both Chicago and California last week (and Boston the week before that) – it’s hard for some investors to remember a cycle they haven’t studied.

For at least one-third of the people we met, the ROC (rate of change) Accounting of The Cycle (US and Global ROC of GROWTH and INFLATION) in “Quad” terms is completely new to them. That’s because they’re prospective clients who’ve never seen our work. 

Of the other two-thirds, the precision by which PMs and analysts have measured and mapped every single quarter in every single country that matters to the Global Economy is all over the place. Some are precise. Some just rely on us to make them aware. 

Does this surprise you? 

It certainly shouldn’t. Having been there and done that, running money is an extremely time-consuming and stressful job under most market conditions, never mind those that see equity markets crash then v-bottom like they just did. 

On the continuum of cycle awareness vs. ignorance, I’m not trying to insult anyone by suggesting they haven’t done all of the work. 

I’m simply reminding you that if no other independent research provider signaled we were going from Quads 1 and 2 (for 9 quarters in a row) to Quad 4, why would you trust they can probability weight where The Cycle is heading next?

That’s probably why so many perma bulls are just blindly hoping for more central banking cowbell and government “deals.” 

Especially for a bunch of “free market capitalists” that’s a little weird, but I digress. This part of The Cycle is very much consistent with the history of economic and market cycles. John Kenneth Galbraith called it, “extreme brevity of the financial memory.” 

In his new book, Mastering The Market Cycle, Howard Marks goes on to cite Galbraith’s Short History of Financial Euphoria

“There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of the memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.” (pg 34) 

Back to measuring and mapping the US Profit Cycle in real-time: 

  1. 67% (338 companies) of the SP500 has reported aggregate year-over-year Earnings Growth for Q418 of +13.98%
  2. That’s a big ROC slow-down from the #PeakCycle growth rates of 24.5% in Q218 and +24.2% in Q318
  3. Basic Materials companies already has NEGATIVE earnings growth of -1.8% in Q418
  4. Energy companies are inflating the aggregate SPX growth rate with +98.9% year-over-year EPS growth in Q418
  5. Technology companies have already seen aggregate year-over-year Earnings Growth slow to 6.3% in Q418! 

And… again… here’s the deal: we haven’t cycled against those #PeakCycle growth rates of Q2 and Q3 yet. That earnings cycle story will play out long after the latest non-government-shutdown and China “deals” do. 

Additionally, here are this morning’s top-down Global Macro Cycle data points: 

  1. USA – NFIB small business confidence continued to slow from 2018 cycle highs to 101.2 in JAN vs 104.4 in DEC
  2. JAPAN – Machine Tool Orders continued to crash, slowing -18.8% y/y in JAN vs -18.3% y/y in DEC
  3. MEXICO – Industrial Production #slowed to -2.3% y/y in DEC vs -1.3% in NOV 

No, DOWN -18.8% y/y (year-over-year) is not a typo… neither is Mexico #slowing well past that super huge and great “trade deal” Trump made with Mexico in 2018! Some Macro Tourist memories are short, but I’d bet at least one-third of them remember that. 

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

UST 10yr Yield 2.60-2.75% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7130-7428 (bearish)
Shanghai Comp 2 (bearish)
VIX 15.01-20.35 (bullish)
USD 95.11-97.12 (bullish)
EUR/USD 1.12-1.14 (bearish) 

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Here's The Deal! - Chart of the Day