Below is a detailed summary of our active Macro Themes. The analysis below is largely sourced from our Global Macro Risk Monitor notes. Please email if you aren’t yet receiving that work and would like to be added to the distribution list. Please note, however, that access is expressly reserved for key client relationships.
USA Quad 4, Then 3:
- 6/21: EARLY LOOK: Lord of the Bells
- Here’s the data-dependence, catalyst calendar ahead of the next FOMC meeting. Of course, it remains tragically ironic that the Fed is forced to contend with an acute campaign to politicize monetary policy …. into Independence Day:
- Earnings Season: “one does not simply print accelerating earnings growth with growth slowing and against peak profit cycle comps”. 2Q/3Q earnings season is not likely to cultivate resurgent growth optimism.
- 2Q19 GDP: Analysts will debate the complexion of the print (i.e. inventories and net exports will be replaced by consumption as a primary support) but year-over-year GDP growth will decelerate … and will continue to decelerate.
- CPI: Inflation comps steepen through July/August and slowing growth and falling input prices (see prices paid/received in the manufacturing survey’s) aren’t helping. In other words, base effects alone will continue to pressure the rate-of-change in price growth lower over the next few months.
- June NFP: Is it likely we rebound off of the May cratering? Probably. But, by the numbers, we’d need to print +266K on the Headline to avoid a further deceleration in payroll growth … which means we need a solid acceleration in earnings growth just to maintain the current pace of aggregate income growth …. which, unless we continue to get a drawdown in the savings rate (into rising economic/geopolitical uncertainty), doesn’t augur much upside in consumption growth.
- June Retail Sales/PCE: The May data was redemptive, at least to the extent it signaled the domestic consumption economy is not set for an acute cratering. Again, with Payroll and Aggregate Income growth decelerating into (extra) steep comps over the June-Aug period, the prospect for a convincing or otherwise durable acceleration in domestic consumerism is not particularly high probability. Remember, also, the call isn’t for imminent recession, it’s for ongoing deceleration
- 6/28: EARLY LOOK: The Fed Is Gonna Cut Soon… “Buy Stocks!”
- Let’s just assume they cut next month. According to every Macro Tourist out there, you gotta “buy stocks” on that, “right?”. Right. We agree. The right kind of stocks, that is.
- When you apply deliberate study the 11 Fed Funds rate cutting cycles since the Fed started explicitly targeting the policy rate in October 1982, you learn that the S&P 500 is up 73% of the time on a 3-months forward, total return basis for a median return of 5.8%. What the Macro Tourists fail to include in their non-study of economic history is that the market is usually led higher by defensive, low-beta exposures – yes, the same kinds of stocks we already like in #Quad4:
- S&P 500 Low Beta Index: up 82% of the time with a median return of +8.5%
- Russell 3000 Growth Index: up 55% of the time with a median return of +0.4%
- That performance spread is exacerbated when you condition the backtests through the lens of our proprietary GIP Model Quadrants:
- S&P 500 Index: UP +0.8% on average 3-months after the initial rate cut when the US economy is then in #Quad4
- S&P 500 Low Beta Index: UP +6.6% on average 3-months after the initial rate cut when the US economy is then in #Quad4
- Russell 3000 Growth Index: DOWN -10.1% on average 3-months after the initial rate cut when the US economy is then in #Quad4
- You either have the Quads or you don’t – it’s that simple. And I humbly submit as the not-so-smart guy who designed the Quads just so I can actually learn how financial markets operate relative to the economy in the first place, you can learn a lot from contextualizing economic and market history via regime segmentation, like:
- Long-term Treasury Bonds tend to outperform the positive absolute return of Investment Grade Credit, which tends to outperform the also-positive absolute return of High Yield Credit three months after the initial rate cut;
- The forward absolute total return of each of the aforementioned fixed income exposures is enhanced when the US economy is in #Quad4 three months out from the initial cut, but the relative performance gap remains the same; and
- The US Dollar Index, Crude Oil, and Gold all tend do decline three months out from the initial cut, but Gold tends to rally when the US economy is in #Quad4.
- All told, even if the Fed cuts in July, history suggests we should make NO changes to our #Quad4 asset allocation mix.
- 6/14: EARLY LOOK: Yikes.
- “It is clear that the US-China trade conflict, including the Huawei export ban, is creating economic and political uncertainty and reducing visibility. Our customers are actively reducing inventory levels.” -Hock Tan, Chief Executive Officer of Broadcom (AVGO)
- Despite his attending Harvard, I have a tremendous amount of respect for my man Hock Tan and any American Capitalist that’s built a large business. That said, however, even I could’ve told you that his customers were going to be “actively reducing inventory levels” – unless, of course, this time was as “different” as it always is to the young analysts on Wall St. who don’t take the time to understand cycles at their inevitable crescendo:
- From my 5/30 Global Macro Risk Monitor note:
- “Not a ton of new news in the revised Q1 GDP data this morning other than a slight positive revision to consumer spending and an equally slight negative revision to inventory accumulation. The contribution to Q1’s outsized Headline GDP growth from Inventories and Net Exports was still egregious at 50%, which represents an 87th percentile reading over a trailing 30yr sample.
- The inventory overhang in the US economy is real, however, and that’s something we should expect to see bite in the coming quarters as trade distortions migrate from being a [positive] demand pull-forward to just a persistent drag on economic activity. Specifically, whenever Inventories have contributed this much to Headline GDP growth as they have over the past three quarters (+304bps in total), we’ve seen a dramatic snapback in short order, per the nine other times the US economy has seen the current level reached/breached over the past 40yrs.”
- Bid at ~$255 in the pre-market after cutting its FY19 sales forecast by $2 BILLION from the $24.5B guidance it gave just three months ago, AVGO’s stock price is going to open today below where it was trading when the “Globally Synchronized Recovery” peaked at the end of 2017.
- … But what I don’t get is how tens of thousands of fundamentally oriented stock pickers worldwide can be this close to an earnings recession and willingly paying wacky multiples for legions of companies that are going to miss just like Broadcom just did. Don’t even get me started with how tight credit spreads are into the aforementioned catalyst. Will the liquidity be there when you need it? More importantly, will you have stored enough ammo to buy the companies you like at lower prices once the Fed “triggers” a #Quad3 pivot later this summer?
- FYI, the Bloomberg Consensus NTM EPS estimate for AVGO just dropped -8.3% in a week.
- 7/2: EARLY LOOK: What If China Keeps Slowing?
- What you’d like me to explain are the balance of pros and cons that lead us to anticipate a rather tenuous inflection into #Quad1 next quarter that most definitely requires pending positive confirmation from both Chinese asset markets and high-frequency economic data – neither of which is occurring at the current juncture.
- Recall that in Q2 our comparative base effects model anticipated an inflection into #Quad2 heading into the quarter, but that forecast was subsequently overturned by our nowcast model with the advent of the dour April economic data – data that slowed… a) against easing comps; and b) prior to the latest ratcheting up of the US-China trade war.
- Easing 2yr comparative base effects;
- Ongoing “fine-tuning” of fiscal and monetary policy via trending accelerations in the growth rates of SOE (+7.2% YoY in MAY) and Infrastructure Fixed Assets Investment (+4.0% YoY in MAY), General Government Expenditures (-20.9% YoY in MAY), Bank Loans (+13.4% YoY in MAY), Shadow Financing (-9.5% YoY in MAY), PBoC Open Market Operations (+30B CNY in JUN), PBoC Medium-Term Lending (-16.7% YoY in JUN), as well as a trending deceleration in banks’ Reserve Requirement Ratios (13.5% in JUL); and
- Ample scope for China’s private nonfinancial sector to re-lever from the perspective of the short-term credit cycle on the mainland
- Steepening 3yr comparative base effects;
- The level of support remains muted relative to the fiscal and monetary policy impulse recorded throughout the Shanghai Accord (growth rates above shown in trailing 5yr percentile terms): SOE (20th percentile) and Infrastructure Fixed Assets Investment (7th percentile), General Government Expenditures (0th percentile), Bank Loans (53rd percentile), Shadow Financing (8th percentile), PBoC Open Market Operations (47th percentile), and PBoC Medium-Term Lending (4th percentile)
- An increasingly impaired monetary policy transmission mechanism that is as clogged with unreported nonperforming loans as it is short of the international capital it now needs to function smoothly
- When you take a step back and analyze the global economy in the context of the aforementioned headwinds, it’s no wonder the JPM Global Manufacturing PMI hit a new cycle-low of 49.4 in JUN – the second straight month of contraction and also the same level that China’s official PMI recorded last month.
- As of JUN, 69% of the 35 economies we’ve received Manufacturing PMI data for thus far exhibited trending deceleration basis, up from the 62% recorded in MAY.
- Accelerating Sequentially: Australia (52), Brazil (51), France (51.9), Germany (45), Philippines (51.3), South Africa (46.2), Turkey (47.9)
- Unchanged: China (49.4)
- Decelerating Sequentially: Austria (47.5), Czech Republic (45.9), Denmark (45), Emerging Markets (49.9), Eurozone (47.6), Greece (52.4), Hungary (54.4), India (52.1), Indonesia (50.6), Ireland (49.8), Italy (48.4), Japan (49.3), Malaysia (47.8), Mexico (49.2), Netherlands (50.7), Norway (51.9), Poland (48.4), Russia (48.6), South Korea (47.5), Spain (47.9), Sweden (52), Switzerland (47.7), Taiwan (45.5), Thailand (50.6), UK (48), US (51.7), World (49.4)
- All told, we remain in wait-and-see mode with respect to a potential Chinese economic recovery in 2H19E. While that doesn’t afford me the usual comfort I derive from generally staying three-to-six-months-ahead-of-investor-consensus on global GIP matters, I can sleep well at night knowing that I’m not advocating for our subscribers to buy global cyclicals ahead of what might manifest into a full-blown global industrial recession. Yes, that is the most probable outcome if China keeps slowing further from here.
- 6/13: Is Now the Time to Back Up the Truck In EM Assets?:
- One month price momentum has officially gone bonkers in/across emerging market risk assets; the 21 [liquid] un-hedged EM equity ETFs we track have appreciated an average of +6% MoM. That sounds paltry compared to something like the XLB, which is up +8% over that same duration, but when you start isolating factor performance, you start to notice a dominant trend that may yield clues to how EM is likely to perform from here.
- Superficially, 1-month “momo” is currently being dominated by current account deficit emerging markets like Argentina (+18%), Brazil (+11%), Greece (+18%), India (+9%), Indonesia (+8%), Philippines (+8%), Poland (+8%), and Turkey (+8%). It’s important to note the returns have been agnostic to economic performance (i.e. the #Quads). Moreover, the skew in relative performance is eye-opening when showcased on a scatter plot and demonstrably steeper than the relationship is with respect to YTD performance – a duration whereby BoP dynamics have not been a meaningful driver of returns.
- The return of the outperformance of current account deficit EMEs relative to their capital-exporting counterparts is suggestive of a broad-based bottom in both EM assets and EM economic growth because it implies both increased supply (e.g. US investors looking abroad) and lower cost (e.g. Fed easing) of dollar denominated capital, regardless of whether it finds a home in hard currency or local currency debt.
- From our 3/14 note titled, “Why the US Dollar Won’t Go Down Yet Despite Being A Crowded Long”:
- “Recall that #Quad4 is also the best global macroeconomic backdrop for US dollar appreciation. Moreover, models are calling for, at best, stabilization in Europe and China here through the balance of 1H19E, with elevated risk that structural headwinds (i.e. clogged credit channel in China vs. treacherous demographics in Europe) prevents either economy from besting cycle-peak comparative base effects until comps become much more surmountable in Q4. Stabilizing ≠ decisive v-bottom into Quads 1 or 2, which is what Mr. Market needs confirmation of to facilitate an equally decisive pullback in the greenback. As such, it’s looking increasingly likely that increasingly popular short dollar trades may have to wait at least the mid-to-late summer before the big payouts start to occur ahead of the global economy finally finding firm footing in Q4.”
- All told, with the dollar still somewhat extended vs. the euro in CFTC net non-commercial positioning terms, it won’t take much improvement in European growth data to trigger a short squeeze in the EUR/USD cross. Our GIP Model conveniently has Germany showing the steepest drop-off in GDP base effects next quarter so we are officially nearing the start of when investors that have avoided blowing up in EM over the past ~18 months should be monitoring for signs of when it’s finally appropriate to back up the truck in this asset class.
- All that being said, however, US #Quad4 is bullish for the greenback so we could see one final devastating gasp higher in the DXY before this trade really gets going, suggesting early rate cut longs could get washed out of the trade before more prudent investors step in later this summer when we currently plan to back the truck up on EM. If the dollar breaks TREND before then, we’ll move to get long(er) sooner; we already like Russia and India, as both currently pass our A │ B Test.
CLICK HERE to download the table in Microsoft Excel format.
Wishing you and yours a happy Fourth of July!