Juliette Declercq, founder of JDI Research, a boutique institutional advisory service that advises some of today's most successful portfolio managers.
During the interview on MacroVoices, Erik and Juliette discuss the outlook for the US dollar, the 10-year US Treasury yields and the FOMC policy moving forward. They reflect on Juliette's perspectives on the red string of fate that ties U.S. to China and the current business cycle. They further discuss where the ISM is heading next, the impact on Trump's tax and infrastructure spending, and the potential surprises for the upcoming French election.
Here are some notable excerpts from the interview discussing the idea that the current business cycle is long in the tooth and Trump is running out of time. They further discuss the strong ISM numbers and her views as to if this has now turned.
Erik: Now in the next section you move on to the business cycle and you pose the critical question of how long does Donald Trump have before it's too late. Please elaborate because a lot of our guests have suggested that this business cycle is very long in the tooth. So, how much longer can the euphoria last and what are the charts on page six telling us?
Juliette: In the section you describe, I've modeled aggregate demand which is all monetary by adding the two sorts of money, basically incomes and the change in debt level. You can see on page six that this perfectly defines the business cycle and also the intermediate cycles.
What should normally happen on the strong ISM boost is that income growth picks up on higher employment or wage gains and credit demand should also pick up. This time the opposite is happening and this is telling me that the Trump trade is fantasy rather than the reality.
The reality is that there is no such thing as a Trump trade in 2016, there was no magic. The global economy reacted to the sharp easing in financial conditions stemming from the Fed's relent and China's vigorous stimulus like it has always done. Because of very strong price base it takes, we had a bounce in activity; for example, energy sector cap ex collapsed 70% from 2014 to early 2016 and this subtracted 0.7% from real GDP.
It's only natural that the bounce in prices necessarily causes the bounce in activity in 2016 from extremely low levels. The same goes for the distressed level of inventory. The issue is that none of those effects can be extrapolated into 2017 and the effect of the global stimulus has largely run its course. In fact, base effects now work in reverse.
In short, there is no such thing as a Trump trade, although it is somewhat discounted by both markets and the Fed, and I see this as a trading opportunity.
Erik: Juliette, the bulls would tell us that the ISM is near all-time highs and that signals nothing but rock-solid growth and economic strength on the horizon. Meanwhile, another popular narrative is President Trump's tax and infrastructure spending initiatives will soon become reality, and these factors can only be bullish for asset markets at least according to the bulls. You see it differently, so please explain why, why don't we start with the graph from pages nine and ten and what they're telling us and explain also where China fits into this story.
Juliette: So, on pages nine and ten, you can see that investment does not in any way corroborate the bounce in ISM, and we started to see signs of a peak in ISM this week with both a weaker manufacturing ISM and a much softer non-manufacturing report. The leading indicators defined by new orders versus inventory sentiment also look to have already turned the corner.
Basically, my fear is that the China-driven early 2016 stimulus caused the debt cap bounce in global activity. Trump's campaign promises greatly and artificially amplified the position of survey effect as hard instincts took over and created the illusion of a more sustainable cycle.
I think we have already reached the top in terms of how far hope can support markets, and I had recommended from the Trump's night to pay rates, anticipating hope to run wild, but reality is now about to hit.
The longer the China growth can hold steady, the longer it will take for financial conditions to tighten more meaningfully, but my best guess is that China growth can only be supported into the congress.
Juliette shared some very important insights, particularly the sensitivity the U.S. economy has to China. The entire interview transcript and chart book are available for download on the MacroVoices.com website.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.