Over the last few months, I’ve written about how we expect growth and inflation to pick up and surprise to the upside in the coming quarters.
This belief is built on positive pressures we’re seeing within the economy as we move into the ‘overheat phase’ and the world benefits from the wealth S-curve tipping point. And with the market holding consensus expectations for continued low inflation, we find this contrarian hypothesis an interesting and potentially lucrative one should it unfold.
But we never wed ourselves to a trade hypothesis because it’s just that, a hypothesis.
Cognitively we’re wired to latch onto single or binary outcomes when thinking and planning for the future. Reality is much messier than that. “Man Plans and God laughs” as the saying goes, which is why we prize mental flexibility above all else.
A favorite trading quote of mine that I often refer to comes from Bruce Kovner. He explains how one should think about markets:
One of the jobs of a good trader is to imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. You keep trying them on one at a time. Inevitably, most of these pictures will turn out to be wrong — that is, only a few elements of the picture may prove correct. But then, all of a sudden, you will find that in one picture, nine out of ten elements click. That scenario then becomes your image of the world reality.
The overheat phase is just one alternative scenario that we’re “trying on”. But there are many potential catalysts, such as a China crackdown on leverage or a large illiquidity impact from Treasury cash balance normalization, which could derail this narrative.
This is why we have to routinely turn to the data to see where we are and to get a better idea of where we may be headed.
So let’s take a look at the Marcus “Trifecta” of Macro, Sentiment, and Technicals of the market to get a sense of where the risks and opportunities lie over multiple timeframes.
Macro: Global reflation picking up steam
Global GDP is hockey sticking higher and the world economy is now growing at 4.3%; the highest level in 7 years.
This growth is matched by global trade which is also growing at its fastest pace since 2011.
The pickup in global growth is routinely beating estimates and trailing twelve month global GDP forecast revisions are at their highest levels in over 7 years and trending higher.
The global manufacturing PMI is trending upwards and hitting new cycle time highs. And the latest Markit PMI report suggests growth and inflationary pressures are building. Here’s a few highlights from the report:
