“We have two classes of forecasters: those who don’t know – and those who don’t know they don’t know.”
-John Kenneth Galbraith
Galbraith (1) must have been smart because he was Canadian. He wrote plenty of popular econ books and spent half a century teaching economics at Harvard. He had a lot of great one-liners about establishment economists too.
What Galbraith didn’t know was that he could have employed a Bayesian Inference #Process with the help of 21st century computing power (predictive tracking algos, python, etc.)…
Now we have three kinds of forecasters: Old Wall’s, Macro Tourists, and Data-Dependent Nowcasters. Maybe I should write a book about that. I’m sure the ivory tower would love it.
Back to the Global Macro Grind…
As Howard Marks reminds us in Mastering The Market Cycle (pg 63):
A) “Most economic forecasts are just extrapolations” and
B) “Unconventional forecasts of significant deviation from trend are valuable if correct”
That’s why Hedgeye’s nowcasts were valuable when:
A) The Global Economic Cycle (China, Europe, and EM) started #slowing in Q1 of 2018
B) The US Economic Cycle started #slowing in Q4 of 2018
That’s also why, no matter what line of questioning our Institutional clients take us down, we always answer the question about what’s most probable to happen next with our ROC (rate of change) cycle research.
But, but…
A) “Keith, what if China does this and the Fed does that and …” or
B) “Darius, what if it’s not Quad 4 or Quad 3 and its Quad 1 or Quad 2”
In the most convincing two-words of the most popular forecasting President in US history, “believe me”… you do not want to be me for a full week of meetings and calls with clients when the market isn’t doing what our nowcasts are suggesting it will!
Measuring and mapping The Cycle (GROWTH, INFLATION, and PROFITS) isn’t a thing that jumps around from A) pro-growth (Quads 1 and 2) to B) slowing-growth (Quads 3 and 4) as markets flip below and beyond a 200-day Moving Monkey.
As you’ve seen with both our “unconventional” #EuropeSlowing (Q4 of 2017) and #ChinaSlowing (Q1 of 2018) nowcasts, we haven’t changed our views on these markets, despite multiple bounces, because the data hasn’t changed.
Check that - the Global #GrowthSlowing data has technically changed this week (i.e. it’s gotten worse):
- JAPAN: exports #slowed to -8.4% year-over-year (recessionary) growth in JAN vs. -3.8% in DEC
- ITALY: industrial orders #slowed to -5.3% year-over-year (recessionary) growth in DEC vs. -2.0% in NOV
- RUSSIA: Real Disposable Income #slowed to -1.3% year-over-year (recessionary) growth in JAN vs. +0.1% in DEC
Don’t worry, I’m not cherry picking the worst data. Home Sales in Turkey dropped -24.8% year-over-year in JAN and Chinese Auto Sales crashed to -15.8% year-over-year in DEC. All good.
Literally the only bullish ROC (rate of change) data point I can give you (other than the shiny Gold (GLD) and Silver (SLV) ones we have you long of) this week is in something else we remain bullish on next to US Treasuries = US Housing (ITB):
- USA’s NAHB Homebuilder Confidence #accelerated to 62 in FEB vs. 58 in JAN
Cool. And how about the real-time ROC on Q418 US Earnings Season?
- 412 of the SP500’s companies have reported aggregate year-over-year EPS growth of +10.85%
- That’s the slowest growth rate of the Q418 Earnings Season (it was tracking +12-14% prior)
- That’s #slowing, big time, from the #PeakCycle EPS growth rate of +24-25% in Q2 and Q3 of 2018
But no worries, with 3 of the 10 SP500 Sectors already showing NEGATIVE year-over-year earnings growth, this must “all be priced in” without having had to lap the toughest compares since Q3 of 2000 (+23%) six-to-nine months from now.
Those who didn’t know Q3 of 2018 was The Cycle peak in the USA definitely don’t know what they don’t know about that.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.60-2.72% (bearish)
UST 2yr Yield 2.42-2.54% (bearish)
SPX 2 (bearish)
Housing (ITB) 33.00-35.99 (bullish)
VIX 14.60—18.98 (bullish)
USD 95.83-97.29 (bullish)
Oil (WTI) 51.20-56.71 (neutral)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
