Macro Digest: “Nobody ever goes to the store to shop because it’s too crowded.” - The US slow-down confirmation is here

US Q4 revisions is out tomorrow and will show a slow-down from 2.6% to 2.0% most likely: (Source: Bloomberg – WECO US)

 

 

This makes Q3(2014) the peak in this cycle and I expect QoQ growth in the US will hit ZERO by Q3 or Q4 – there are several factors for this including rising real rates, mal-investment into energy but most importantly is the falling earnings in the US.

 

Societe General – Global Quantative Research does an excellent report titled: Global Earnings Estimate Analysis – Is the US heading back into recession:

 

I have borrowed the main chart – which shows how the six month change in 12m Earnings Per Share coincides with US GDP – not pretty and definitely NOT what neither Janet Yellen and Wall Street promised me less than two months ago.

 

 

 

 

US quarterly GDP has been 3.0 since 1970 and 2.6% since 2000 – with big swings:

 

 

I see a repeat of the growth pattern from late 2006 into 2008.

 

The market is focused on the telegraphed June potential Fed hike, but this week Janet Yellen speech clearly have got people thinking as she again introduced inflation concerns and "data watching"…. In other words we need to again look at the actual economy and its performance which is a bad news for the happy campers in the equity market.

 

 

This chart will soon have relevance for all asset classes' – It shows the outperformance on expectations from Europe over the US. May I add EXACTLY the opposite of consensus two month ago, except for a few analysts. US data has consistently done worse than expected.

 

 

The point however is US data been worsening for a long time – I personally think we are in period where we yet again hand-over the growth engine from the US to emerging market but via a significant new low in growth which will make Europe looks good. The expected path for me is:

 

Slow down confirmation in the US over the next two month – that will kill the improvement in Europe by end of Q2 and leave it stabile - not growing for the year, meanwhile emerging market will come back as market realize the FOMC is years away from 'talking up' rates. The June or September initial hike (if it comes) will still leaves FOMC 100 bps above Wall Street on its projected long-term path for growth – A Wall Street who on their own is also too optimistic about future growth. Fed sees 3.0-3.5% on this "dots" while Wall Street sees 2.5-3.0% on average. In other words there is room for a +100 bps correction to the sustainable long-term growth which will render 10 Y rates a 1.0-1.5% before we over with this part of the cycle, which I label: Restarting the business cycle.

 

Restarting the business cycle as policy measures, QE and targeted "help" for banks is running if not out time then out of impact on the economy. The inequality and low salary to GDP base simply can't produce enough domestic consumption anywhere for the middle class to be able to afford the products the stock market listed companies produce.

 

The chart below is my July 2013 projection of rates – as you will note the "calendar" needs to be moved further forward… 2014 in chart is now 2015 due to Bank of Japan and the constant hope of "lift off" in rates, but the actual pricing rhythm has been relatively precise and predictive.

 

 

There is a few more charts which needs my (and maybe your attention)

 

Port of L.A traffic has collapsed. Yes, some of it is to do with strikes and unions but…. Look at size of drop! Deeper than March 2009!

 

 

Have no illusions – US short-term rates is rising:

 

 

The outlook for Europe remains… more of the same:

 

 

 

Conclusion:

 

Macro

 

We are in a "in between period" -  where the US will slow-down and ultimately hand-over the growth engine to emerging market by the earliest Q4-2015 but firmly in 2016. Problem is emerging market not ready due to high US dollar debt and waning commodity prices and Europe is still too weak to contribute net to world growth leaving a growth vacuum for new growth.

 

Europe will show one more month of improving data, then global slow-down EM and US will drag down the data to flat performance – Europe will still do better than expected in 2015 but not enough to constitute a real improvement yet.

 

Markets

 

I still only have one very strong view and that's 10 YR fixed income will trade 1.5% even potentially 1.0% this year – everything else will lag this move by 9 month – so in other words if low in yields comes in Q3 (as I expect) then the summer of 2016 will be the lift-off we all have talked about.

 

The US Dollar will peak this quarter and probably have peaked for this cycle – The weaker US Dollar will stabilize commodities and emerging market creating the conditions for a hand-over end of this year. The US dollar should be very sensitive to this relative slow-down in the US, especially as Europe is a-synchronically improving.

 

Gold remains top of my list for new investment – I'm long and adding – I have also re-sold Brent/Crude as the marginal cost of producing oil is still rising, meaning global impact still is negative net-net. Jeremy Grantham excellently argues that for world to benefit from falling energy prices it has to come with falling marginal cost. The opposite is the case now: lower prices, higher production/extraction costs.

 

The stock market…..Not time yet to call the top, but preparing special report on valuations and models, or the lack of it…. Conclusion will be: There is potential for a 5-10% year but also for a 25% correction. Really totally binary, problem of course being that the market is very expensive by traditional standards, but this is hardly normal times. The expected return for reference over 1, 3 and 10 years can be seen below – the upside that first year still can carry market higher, the downside the next 9-10 years!

 

Source:  Novel Investor, Feb. 20^th, 2015

 

 

Finally,

 

This is a must read note on my main concern for this market: The lack of real market making capacity:

 

Lawrence Goodman, Feb, 25^th, 2015:  Center for Financial Stability: Liquidity shortage- Houston we got a problem

 

 

Safe travels,

 

Steen

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

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