Antipodean Capital Macro Strategy Q1 2019 Review - Are Growth Assets A Buy For A Final High, Or A Sell On Rallies?

KEY POINTS
• The post GFC growth cycle is mature, with the US cycle 153% of normal length. All 22 Recession Matrix US indicators are historically extreme. All major economies growth cycles have peaked. A GDP, inflation and Fwd EPS downgrade cycle is a key risk for growth assets in Q1.
• Monetary policy responded by tightening globally, and especially in the US. However a Q4 inflation decline, slowing global data, and falling stocks imply that the Fed is ready to pause rate hikes, as a 2.5% Fed Fund rate, given 1.8% Core PCE, implies rates are 0.7% real already.
• We look at the key question after Q4’s stocks decline, namely whether this is a late cycle dip to buy, or whether rallies should be sold into. We conclude the latter, after reviewing the investment cycle location (slowing growth to recession), whether markets are priced for recession (only 50%), positioning (still long growth assets), US data cycles (to slow into Sept), the Fed (pausing hikes won’t be enough if data keeps slowing), trade (part of the story), the US shutdown (may extend) and impeachment (will happen, White House paralysis producing).
• All major economic bloc analyses show deceleration trends which are not yet over. We position where macro risks are underpriced (GDP, inflation, EPS downgrades) and positions are extremely counter to this pricing.
• Asset allocators: Sell stocks & HY into rallies. Overweight Japanese/large cap v AU equities. Be Long flatteners, Bonds, low yielding FX, short USD, long precious metals.

Themes for Q1
In this quarter’s review we discuss 14 key themes:
1. Our major theme asks if stocks are a buy (“cheap”) after the Q4 decline. We use 8 criteria around the investment cycle, market pricing, positioning, the US data cycle, the Fed, trade & China, US government shutdown, & impeachment, and conclude that rallies should be sold;
2. Our Recession Matrix flags a ST technical rebound, our boom bust measure is flagging a slowdown;
3. Global data cycles are set to decelerate through ’19;
4. US data cycle: A Sept ‘18 peak is now in place, ISM data can decline until Sept ‘19 and sub 50 PMI’s;
5. Fed: Is the Fed’s signaling of a rate hike pause in response to a -20% S&P and FCI of +1 enough for markets? The answer will lie with US data and Q1 EPS;
6. Yield Curves: The US curve is inverted from cash to 7yrs. Only 10 & 30yr yields are not. The Fed will need to ease, not just halt hikes, to steepen the curve;
7. US Profit Cycle: Q1 season the most crucial in 10yrs;
8. Positioning: Markets are nowhere near as bearish on growth assets as they were in ’16/’12/09 or ’03. Trade short growth assets and long safe havens;
9. China – Still slowing;
10. NZ – Getting soggier;
11. Australia – Cycle peaked is in;
12. EU – Cycle Peak;
13. UK – Softening Yet Again;
14. Japan – Recession Risk Rising Again?