long pause or finally a peak?
TRANSCRIPT
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Long Pause Or Finally A Peak?Where The Global Economy Stands And The Outlook For Asset Markets.
April 29, 2019
An independent research firm that uses big data to present timely investment ideas in an easy to understand format.
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Introduction
• Bespoke Investment Group is an independent research provider and asset manager headquartered inHarrison, New York.
• What is a Global Macro Strategist?
• More importantly, what is “Global Macro”?
• “Macro” refers to an investment process that is top-down, policy-sensitive, driven by economic trends,involves multiple asset classes, and pursues absolute returns.
• Macro investing does not rule out investment in single stocks, but generally seeks to identify macroeconomiccatalysts as opposed to microeconomic catalysts.
• Policy catalysts: central bank or fiscal authority reactions to economic, financial, or political changes.
• Economic catalysts: economic or financial market shocks or trends.
• Behavioral catalysts: identifying market mispricing of risk driven by bias or poor understanding.
• Toolkit: economic data, economic models (either formal or informal), policy communication, technicalanalysis.
• Successful macro trading requires risk management, diversification, and flexibility.
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Four Down, Eight To Go: Market Recap
S&P 500, Weekly, Past 5 Years
P/E vs 30y Average (%) 10 Year Yield, 1986 - Current
1700
1900
2100
2300
2500
2700
2900
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70S&P 500 Trailing P/ES&P 500 P / Est NTM EPS0%
1
2
3
4
5
6
7
8
9
10
11
10 Year Yield
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The Fly In The Ointment: Global Growth
US Guidance Is Sensitive To Global Growth Global Activity Reversed Hard In 2018
48
49
50
51
52
53
54
55
56
-12
-8
-4
0
4
8Monthly Equity Guidance Spread(SA By Bespoke), 3m Avg
Markit Global ManufacturingPMI
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
-20
-15
-10
-5
0
5
10
15
20Global Trade Volumes YoY
Germany ManufacturingNew Order Volumes YoY
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Where Does The Shock Come From?
Decomposition of YoY Global Trade Volumes By Region, Through January 2019
Germany Manufacturing New Order Volume % Change Since December 2017 Peak
-2.42
0.47
6.05
2.09
0.67
-4.89
-6.66
-8.90
-2.00
-0.38
-1.88-1.88 -2.21
-0.88
1.89
-1.55 -1.12-1.82
-3.86
-7.51
0.07
6.60
-10
-8
-6
-4
-2
0
2
4
6
8
World AdvancedEconomies
US Japan Eurozone OtherAdvanced
EmergingEconomies
EmergingAsia
EmergingCEE
LatAm Africa &Middle East
Exports
Imports
-16
-14
-12
-10
-8
-6
-4
-2
0
Total
Domestic
Eurozone Foreign
Non-EZ Foreign
-15
-10
-5
0
5
10
15 Total
Intermediate
Capital
Consumer
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Eurozone Shock: Auto Industry
Eurozone Exogenous Shock: Emmissions Regulation Germany Auto Manufacturing Order Volumes
Last month of sales before
Euro 6C 8/31/2018,
14.33
Euro 6C Emmissions
Regulation Takes Effect 9/30/2018,
8.79
7
8
9
10
11
12
13
14
15
Eurozone Auto Sales (mm SAAR)
1H '18 Avg
Q3 '18 Avg
Q4 '18 Avg
Q1 '19 Avg
70
80
90
100
110
120
130
140
2018
Domestic
Eurozone
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Chinese Credit: Real Or Behavioral?
Chinese Growth Has High Credit Intensity Chinese Credit Looks Correlated To Equity Markets… …But Much Less So Presented Like-For-Like
-12
-10
-8
-6
-4
-2
0
2
4
% Change in Credit Less %Change In NGDP (QoQ)2003 - 2008 Average
2009 - Current Average
14
15
16
17
18
19
20
-20
-10
0
10
20
30
MSCI World (USD) YoY % Change
Chinese Total Social Financing YoY Change (trn CNY)
0
5
10
15
20
25
30
35
40
-20
-10
0
10
20
30
40
50
60
MSCI World (USD) YoY % Change
Chinese Total Social Financing (USD), YoY %
100
120
140
160
180
200
220
Total Social Financing % of GDP
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Made In China Makes A Comeback
Chinese PMI Confirms Domestic Strength China Industrial Production Volumes: Past 10 Years YoY
44
46
48
50
52
54
56 CompositeOutputNew OrdersNew Export OrdersImports
-4
0
4
8
12
16
20
24
Total
State Owned
Shareholder Owned
Foreign Owned
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Third Shock: Not A Shock At All
Global Expectations Cycle: Citi Economic Surprise Indices, 2004 - Current
10
20
30
40
50
60
70
80
-120
-100
-80
-60
-40
-20
0
20
40
60
80
1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15 1/16 1/17 1/18 1/19
Global Std Dev of Japan, EZ, US, China, EM (3m Avg)
Synchronized outperformance Synchronized
disappointment
-200
-150
-100
-50
0
50
100
150
200
1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15 1/16 1/17 1/18 1/19
Japan Eurozone US China EM
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What About The US?
Another Mid-Expansion Slowdown Has Played Out ISM Manufacturing PMIs: US Outperforms, But Not Immune
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Average Z-score of YoYChange In Payrolls,Manufacturing Production,Retail Sales, Single FamilyStarts
28
30
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
China, 50.8
Japan, 49.5
UK, 55.1
Euro Area, 47.8
Global, 50.6
USA, 52.4
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Fiscal Stimulus Offered Promise
Net Effect of Fiscal Policy Changes, % of GDP By Fiscal Year Cumulative Fiscal Effect of Policy Changes, % of GDP Fiscal Effect of Recent Policy Changes, % of GDP By Fiscal Year
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Disaster Relief
Budget/Spending Caps
Taxes
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Disaster Relief
Budget/Spending Caps
Taxes
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
Fiscal Year Deficit/GDPActual
Fiscal Year Deficit/GDP CBOBaseline
Fiscal Year Deficit/GDP CBOBaseline + Fiscal Changes
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Declining Receipts Have Not Boosted Growth
Federal Receipts By Major Type, 3m Average, % of GDP Federal Outlays, Receipts, & Growth Sensitivity
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Corporation IncomeTax 3m Avg % ofGDP, 0.99
0.10
0.15
0.20
0.25
0.30
0.35
0.40
CustomsDuties 3m Avg% of GDP,0.34
12
13
14
15
16
17
18
19
20
21
Total 3m Avg% of GDP,16.39
4
5
6
7
8
9
10
11
12
13TotalIndividualIncome Tax3m Avg % ofGDP, 7.83
4.0
4.5
5.0
5.5
6.0
6.5 Outlays 80s Average 90s Average
00s Average 10s Average
3.0
3.5
4.0
4.5
5.0
5.5
Receipts 80s Average90s Average 00s Average10s Average
-0.16-0.20
-0.07
0.22
-0.02
0.17
0.11
-0.03
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
Since 1980 Since 1990 Since 2000 Since 2010
Outlays Receipts
Correlation of YoY
% of GDP to NTM Real GDP Growth
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US Households Still Not Re-Leveraging
Composition of YoY Growth In Domestic Debt, By Sector Debt by Sector, % of GDP
-6
-3
0
3
6
9
12
15
18
Domestic financial sectors, 0.37%
Federal government, 1.86%
State/Local Ex Pensions, -0.01%
Nonfinancial business, 1.43%
Households and nonprofit organizations, 0.84%
Domestic Total, 4.49%
20%
30%
40%
50%
60%
70%
80%
90%
100%Recessions
Households and nonprofitorganizations, 74.8%
25%
35%
45%
55%
65%
75% Recessions
Nonfinancial business, 73%
20%
30%
40%
50%
60%
70%
80%
90% Recessions
Federal government, 85.5%
0%
20%
40%
60%
80%
100%
120%
140%Recessions
Domestic financial sectors, 78.2%
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Markets To Fed: The Cycle Is Over
Hike Pricing Hasn't Been Very Accurate: Reason To Doubt Cuts? Recent Rates Rally Was Positioning-Driven
-2
-1
0
1
2
3
4
5 Market Pricing
YoY Change In Fed Funds Rate
Market pricing is difference between 1y1d OIS forward and 1m1d OIS forward. Fed Funds rate change is YoY change in Fed Funds rate, 1y ahead, smoothed to account for volatility. Both expressed as 25 bps hikes/cuts.
-25
-20
-15
-10
-5
0
5
10
15
20
Eurodollars
USTs
CFTC Comittment of Traders: Speculative tradersr net positioning DV01 as % of Total Open Interest DV01.
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US Catalyst: Housing
New Home Sales Reversing Higher, Inventories Clearing Rates Heuristic: Housing Stocks vs Mortgage Rates
200
400
600
800
1000
1200
1400
2
4
6
8
10
12
14
16
Months Supply
Median Months On Market(SA By Bespoke)
New Home Sales ('000sSAAR)
28
30
32
34
36
38
40
42
4.0
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
National Average 30y FixedRate Mortgage Rate (Adv 1m,Inverted)
iShares U.S. HomeConstruction ETF (ITB)
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Implications: Interest Rates
The Trend Is No Longer Duration's Friend Term Structure Inverted…Depending On The Curve (%)
1
2
3
4
5
6
7
8
9
10
11
10 Year Yield
-1
0
1
1
2
2
3
3m5y UST Curve
2y10y UST Curve
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Implications: Equity Markets
GICS Level 4 Sector
Tech Hardware, Storage & Peripherals AAPL HPE HPQ NTAP STX WDC XRX
AMG AMP BEN BK BLK CBOE CME ETFC GS ICE IVZ
MCO MS MSCI NDAQ NTRS RJF SCHW SPGI STT TROW
ADI AMAT AMD AVGO INTC KLAC LRCX MCHP MU MXIM NVDA
QCOM QRVO SWKS TXN XLNX
BAC BBT C CFG CMA FITB FRC HBAN JPM KEY MTB
PBCT PNC RF SIVB STI USB WFC ZION
Metals & Mining FCX NEM NUE
ALB APD CE CF DOW DWDP ECL EMN FMC IFF LIN
LYB MOS PPG SHW
Textiles, Apparel & Luxury Goods CPRI HBI NKE PVH RL TPR UA UAA VFC
Automobiles F GM HOG
Industrial Conglomerates GE HON MMM ROP
CCL CMG DRI HLT MAR MCD MGM NCLH RCL SBUX WYNN
YUM
Leisure Products HAS MAT
Consumer Finance AXP COF DFS SYF
CAT CMI DE DOV FLS FTV IR ITW PCAR PH PNR
SNA SWK WAB XYL
AAP AZO BBY FL GPS HD KMX LB LOW ORLY ROST
TIF TJX TSCO ULTA
Airlines AAL ALK DAL LUV UAL
Construction & Engineering FLR JEC PWR
Elec. Equip., Instruments, Components APH FLIR GLW IPGP KEYS TEL
Air Freight & Logistics CHRW EXPD FDX UPS
Electrical Equipment AME EMR ETN ROK
Diversified Financial Services BRK/B JEF
Household Durables DHI GRMN LEG LEN MHK NWL PHM WHR
Road & Rail CSX JBHT KSU NSC UNP
Multiline Retail DG DLTR JWN KSS M TGT
Building Products ALLE AOS FBHS JCI MAS
Auto Components APTV BWA
Distributors GPC LKQ
Construction Materials MLM VMC
Banks
Chemicals
Hotels, Restaurants & Leisure
Machinery
Specialty Retail
Cyclicals Are Where To Look For OutperformanceStocks
Capital Markets
Semis & Semi Equip.
0.95
1.00
1.05
1.10
1.15
1.20
Cyclicals / S&P 500
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Conclusion
• The global economy has paused, but looks likely to recover.
• European and Chinese activity are the key areas to watch for confirmation of a recovery.
• US economic activity has paused, but should rebound.
• Favor cyclical stocks and low-duration fixed income.
Questions?
Contact
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