“They thought China would fail.”
-Hitoshi Tanaka
That’s a quote from a Japanese diplomat in Chapter 8 of Asia’s Reckoning that is titled “Yasukuni Respects.” It’s a quote from the early 1990s. Back then, evidently the Japanese thought wrong.
I spent the last 3 days in San Francisco, California where failure is saturating the sidewalks. If you thought that some of The People would fail during the thralls of the highest cost of living of the modern era, you thought right.
Who will fail next? Will the Chinese ultimately fail to achieve their “China Dream” of becoming the world’s first non-Western, non-Democratic, state to have the world’s highest GDP by 2025? Or will they succeed?
Back to the Global Macro Grind…
The more meetings I have with Western investors, the more I realize that no one really knows anything about China’s future any more than I do. That said, plenty of people (and portfolios) are hoping for a “trade deal” and Chinese recovery.
But hope is not a risk management #process.
While there are plenty of hopes that Presidential tweets and rate cuts are going to make everything great again. The companies (like Micron again last night) still have to report reality.
Q: What’s reality?
A: US #EarningsSlowing to negative on a year-over-year basis in Q319.
The more meetings I have with Western investors, the more convinced they are that both earnings and capex #slowing to negative on a year-over-year basis is bad.
#Brilliant takeaways there, eh?
Not as brilliant as being long #GrowthSlowing via Treasuries, Gold, Utilities, REITS, etc. has been for #FullCycleInvestors who made those Asset Allocation decisions when the US economic cycle peaked in Q3 of 2018, but brilliant enough.
Bottom-up investors seemingly understand what’s good and bad for a “stock” more so than what causes those good and bad things to #accelerate and #decelerate to begin with!
An unbelievably great and beautifully brilliant example of this is how many people agree with us now that being LONG Housing (ITB) should be a core Asset Allocation in an Equity portfolio. Rewind and remember:
A) At this time last year, portfolio managers were puking Housing related investments
B) 1-year later, Long Housing (ITB) keeps making new cycle highs
How could the Old Wall in all its “valuation” glory not have understood that:
A) Shorting Housing during late 2017 as the US economy entered #Quad2 (i.e. rates rising)…
B) Made as much sense as buying Housing during #Quad 4 in Q4 of 2018 (i.e. rates falling)?
Amongst our loyal (and growing) #FullCycleInvesting subscriber base, who is going to fail to get Housing right next time The Cycle comes their way like this one did? If you want to be a great money manager, failing to get the easy stuff right is unacceptable.
How great is the US Housing data right now?
- This morning’s Mortgage Purchase Applications and August NHS data extend last week’s fundamental acceleration streak (HMI, EHS, Purchase Apps & Starts all beat) with Y/Y growth in Purchase Application volumes tracking at a 3Y high for September while New Home Sales rose +7.1% M/M (against upwardly revised July estimates) while accelerating to +18% Y/Y.
- The simple reality is that +18% Y/Y is outlandishly divergent relative to pretty much any other macro activity reading domestically or globally and underscores the organic mojo + rate tailwind + easy comp constellation we’ve been harping on for months now. As simple a conceptual thesis as that is, it remains the defining factor set for housing at present.
#OutlandishlyDivergent says my US Housing analyst team of Josh Steiner and Christian Drake! Very Trumpian of you, boys. But it’s nice, really really nice, to see that what these guys are writing about is actually true.
The other new economic truth about US Housing came in yesterday’s US Pending Home Sales report. Wait for it … the ROC (rate of change) #accelerated to a 41-month high of +2.5% year-over-year growth!
And if you have friends who want to (read: have to) stay long “Secular Grower” Software (IGV) stocks (i.e. companies that have never seen a cycle) into SALES and EPS #slowing when they can be long a hockey-sticking housing cycle? Let them eat TAM.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.60-1.86% (bearish)
UST 2yr Yield 1.55-1.76% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
NASDAQ 7 (neutral)
Utilities (XLU) 62.79-65.39 (bullish)
REITS (VNQ) 91.55-93.80 (bullish)
Financials (XLF) 27.37-28.50 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 210 (neutral)
DAX 12097-12514 (bearish)
VIX 13.31-18.08 (neutral)
USD 97.56-99.31 (bullish)
EUR/USD 1.09-1.11 (bearish)
USD/YEN 106.70-108.51 (neutral)
GBP/USD 1.22-1.25 (bearish)
USD/CHF 0.98-1.00 (neutral)
Oil (WTI) 54.11-62.03 (bearish)
Gold 1 (bullish)
Copper 2.53-2.67 (bearish)
Bitcoin 7 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
