Is Billionaire Ray Dalio Right About The U.S. Economy?
When Ray Dalio talks, people listen. The billionaire founder of Bridgewater, the world's largest hedge fund, recently grabbed headlines when he told CNBC he thinks the U.S. economy is in the seventh inning. Dalio warned that he sees risks increasing "as time progresses" and that investors should be "more defensive" in the stock market. If he’s correct, and the current economic cycle is in its latter innings, that will obviously have significant consequences for future market returns.
On a related note, earlier this year, shortly after we issued our own #EuropeSlowing call, it was reported that Bridgewater had more than quadrupled its bet against European Union companies. As we wrote at the time,
"Contrary to our positive outlook in the U.S., our model is prospectively signaling a concomitant deceleration in both economic growth and inflation across the Eurozone economy. This view is very counter to consensus that remains extremely complacent on the long side of the euro and European equities."
As the market scoreboard shows, shorting Europe (and ignoring consensus which was still bullish on Europe and the flawed “synchronized global growth” story) has paid off rather handsomely.
So, where are we in the U.S. economic cycle?
Our macroeconomic team at Hedgeye follows over 200 data series in real-time which we believe offer valuable investing insight on the U.S. economy. We provide updates on our economic models every morning on The Macro Show. While we can’t state with 100% precision that we are in the seventh inning, the three charts below appear to indicate that the U.S. economic cycle is certainly peaking.
It’s also worth mentioning that most mainstream financial news media focused investor attention on stories that won’t ultimately impact intermediate and long-term returns. For example, in the short run, headlines about Chinese tariffs, NAFTA renegotiation and the “disaster of the day” in emerging markets will impact the stock market. But investors would do well ignoring these news headlines and focusing instead on the actual economic cycle.
The first chart below highlights NFIB Small Business Confidence.As the chart shows, small business confidence is literally at its highest level ever. In the short run, high business confidence is positive and suggests these companies are likely to be hiring and investing in their businesses. It’s supportive of a growing economy. The more relevant point though is that business confidence is unlikely to improve much from here. In fact, it’s much more likely to slow on a rate of change basis.
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The second chart below shows ISM Manufacturing.
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The third chart shows consumer confidence.
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In sum, these charts suggest a U.S. economy where manufacturing won’t get much better, small business optimism is unlikely to go a lot higher, and in which the consumer is as confident as they have ever been. This is not to say that because these measures of the economy are near (or at) all-time highs that a recession is imminent, but rather that the economy has a high probability of seeing the second derivative of growth slow (effectively the growth rate of the growth rate).
The Hedgeye country level model focuses on the rate of change of growth, inflation and policy. Currently, we are predicting a shift into Quad 4 into Q4 2018 / Q1 2019. In this environment, the rate of economic growth slows, inflation decelerates, and policy gets incrementally dovish. So, if you are wondering why large cap growth stocks aren’t acting as well, it’s because they are probably sniffing out this economic transition.
Bottom line? Dalio’s seventh inning analogy makes a lot of sense. While we are not at the end of the game, everything we are modeling suggests we clearly getting close. |
