Is your portfolio prepared for global stagflation?
Because if our analyst forecasts are correct, global growth is starting to slow and inflation is picking up.
There are significant investing implications.
We just hosted a special webcast on this very subject … “Investment Playbook for Global Stagflation.”
CLICK HERE to watch this entire webcast where we explain the key investing conclusions.
(Below are 3 key takeaways transcribed from the webcast.)
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Keith McCullough: Let’s jump right into the process. This is Hedgeye style. We’re talking rate of change.
The Old Wall drives their conclusions based on valuation, how things feel and what they think markets should be doing, because they’re too expensive or cheap.
This time is “always different” for them.
Conversely, what we’re doing is simply measuring and mapping facts, as opposed to spouting opinions. The rate of change in both growth and inflation is factual. It can be measured. So for us it’s all about whether the data is accelerating or decelerating. The data isn’t good or bad. It’s getting better or worse. (Brian – Change in the rate of change – second derivative that we always discuss)
This isn’t complicated. We have two factors: Growth and Inflation. We produce forecasts for growth and inflation on a rate of change basis for 50 economies around the world and plot each of these outcomes.
Each of these outcomes is assigned a “quadrant” in what we call our Growth,Inflation, Policy (GIP) model and the typical government response as a result (neutral, hawkish, in-a-box or dovish):
- Growth accelerating, Inflation slowing (QUAD 1);
- Growth accelerating, Inflation accelerating (QUAD 2);
- Growth slowing, Inflation accelerating (QUAD 3);
- Growth slowing, Inflation slowing (QUAD 4)
We’re currently tracking in Quad 3 in both the U.S. and globally. That’s where you have growth slowing and inflation accelerating on a trending basis.
That’s called stagflation.
When growth and inflation slow at the same time (into the 4th Quadrant), that’s when the Fed, ECB or BoJ – any central planning agency for that matter – devalues the currency to create inflation. This is where the U.S. and global economies are headed into the back half of 2018.
Why does our GIP model matter? Because what Quad you’re in predicts the returns across asset classes and subsectors.
In Quad 2 and Quad 3, there’s generally a pivot into long Energy stocks (XLE) and Commodities – i.e. the “flation” part of stagflation – and you start to get short of certain equity markets and credits.
If we’re right on our U.S. GDP forecasts, we’re at the peak of the cycle in the 1Q 2018.
You’ve had seven consecutive quarters of accelerating year-over-year U.S. growth, from 1.2% GDP in 2Q 2016 all the way up to 2.9% in 1Q 2018. And now we’re rolling off the top. Our projections see GDP falling for the next four quarters. That’s our call and we’re sticking to it. (Brian – he is sticking his neck out and his call is non-consensus)
McCullough: Next up, our call on #GlobalDivergences. Now, U.S. growth is slowing but, at the same time Europe and China are slowing at a faster rate than people thought. Not us. We made those calls on #EuropeSlowing and#ChinaSlowing.
This is not an opinion. These are rate of change facts.
Even if the Old Wall and all of its followers (who get paid by their conflicts of interest) don’t get it, you’re going to get it. If you look at the chart below you see a lot of yellow in 2Q 2018. That’s Quad 3 (Growth slowing and Inflation accelerating). You can see this in the mode of our GIP model forecasts for all of these economies at the bottom of that chart. Our forecast is for stagflation globally.
So we want to help you risk manage that.
McCullough: Last point. The thing that nobody wanted to hear when we introduced this call in April? The U.S. dollar was bottoming. (Brian – that was a great call) Now people are talking about it. We’ve seen pretty dramatic moves in the currency markets all of a sudden.
Here’s the point. The #1 reason why the U.S. dollar bottoms and starts to go up is #GlobalDivergences. The #1 loser when the world is in a ‘globally synchronized recovery’ is the U.S. dollar (i.e. when growth is accelerating around the world and you’re in Quad 1 and Quad 2).
The math is straightforward. What we’re showing you below is the backtestwhen the global economy moves from a “globally synchronized recovery” of Quad 1 and Quad 2 to global growth divergences (i.e. Quads 3 and 4). The U.S. dollar goes up. It can go up a lot.
This is a huge risk. A rising dollar is deflationary by definition for all those things denominated in U.S. dollars including Emerging Market debt.
Click here to watch the entire 40-minute webcast and understand the investing conclusions.