Economic Growth Has Already Bottomed


  • Amidst rampant fears about a recession, partially provoked by a yield curve inversion, something interesting has happened.
  • Specifically, global economic growth already appears to have bottomed.
  • Bigger picture, this development has the potential to spark a massive capital rotation, as almost everyone is positioned in the lower for longer camp.
  • This idea was discussed in more depth with members of my private investing community, The Contrarian. Get started today »

A 60:40 allocation to passive long-only equities and bonds has been a great proposition for the last 35 years… We are profoundly worried that this could be a risky allocation over the next 10."

- Sanford C. Bernstein & Company Analysts (January 2017)

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria"

- Sir John Templeton

Life and investing are long ballgames."

- Julian Robertson


For someone who has regularly used a version of the following table the past five years, I am more bullish than you would think, particularly on a subset of undervalued, out-of-favor equities.

(Source: Author, GMO)

More specifically, I am bullish on economically sensitive equities, with global growth bottoming in 2016.

Recently, a partial inversion of the U.S. yield curve has sparked fears about a forthcoming recession, yet in the midst of this development, something interesting has happened.

Global economic growth readings have turned higher, once again, and this has important implications for many investors, most of which are positioned with "lower for longer" in mind.

Investment Thesis

Global economic growth bottomed in early 2016, accelerated, then pulled back once again over the past year and several months. This secondary dip in global growth expectations has left its fingerprints all over the investment landscape, however, global economic growth has likely already bottomed, this time at a higher low than 2016 levels, and is once again turning higher.

China Led Global Growth Higher In 2016 And Lower In 2018

China's slowing, particularly, relative to its growth expectations from 2011-2015 caused global capital to flow to the United States. However, in late 2015 and early 2016, a massive fiscal and monetary stimulus from China stemmed the relative downturn in their economic growth, and sparked a brief reflationary trade that caused many crowded trades to become unwound.

Publicly, I wrote about this, with an article titled "The King Of All Reversal Trades Has Arrived" published on Seeking Alpha on March 4th, 2016.

This reflationary/inflationary narrative was accelerated by the surprise results of the U.S. election in November of 2016, prompting the expectation of increased fiscal spending.

Ultimately, this narrative faded, and Chinese equities, as measured by both the Deutsche X-Trackers Harvest CSI 300 China A -Shares ETF (ASHR), and the iShares China Large-Cap ETF (FXI) rolled over in January of 2018, prompting a return to the 2011-2015 landscape where global capital flows reverted back to the United States, which has become the safe-haven investment in a world of low global growth.

(Source: Author,

Looking at the charts above, the pain was most acute in the fourth quarter of 2018, with global growth weakness spreading to even the relatively immune U.S. stock market, as measured by the SPDR S&P 500 ETF (SPY), which is shown below.

(Source: Author,

Just when it looked like everything was unraveling, and everyone was turning bearish (I wrote an SA article on December 21st 2018 with the title, "Is Everyone Bearish?"), China stepped in with renewed fiscal and monetary stimulus (this actually started in the fall of 2019), and global central banks universally reversed their tightening bias, prompting a "V-Shaped" equity rally. Ironically, this equity rally has been led by emerging market equities, specifically Chinese equities, which were the first equities to turn down in 2018.

Yield Curve Inversion Adds To Fears

Despite the upturn in global equity indices, and even with U.S. benchmark equity indices like the S&P 500 Index, the Dow Jones Industrial Average (DIA), and the Invesco QQQ Trust (QQQ), all within 1% of their all-time highs, pessimism and skepticism have remained elevated, partly because a portion of the U.S. Yield curve recently negatively inverted, as shown below.

(Source: Author,

While short-term U.S. Treasury Yields did briefly exceed longer-term yields, as shown by the spread between the 10-Year U.S. Treasury Yield and the 3-Month U.S. Treasury Yield above, and this brought back fears of the peak-to-trough -60% S&P 500 Index bear market from 2008-2009, and the -50% S&P 500 Index bear market from 2000-2002, I believe this inversion is more a result of the current market structure, instead of an accurate forecaster, where almost all market participants are positioned for "lower for longer," combined with a healthy dose of fear.

Economic Growth Revised Higher

While fear was peaking, as evidenced by the yield curve inversion, economic growth expectations have actually ratcheted higher, as shown by the Atlanta Fed GDP Now Growth Estimate.

(Source: Atlanta Fed)

Additionally, China's previously mentioned fiscal and monetary stimulus, initiated in the fourth quarter of 2018 and accelerated in the first quarter of 2019, appears to be working its way into the local economy.

Manufacturing Conditions Improved in China for First Time in Four Months

(Source: Bloomberg, U.S. Global Investors)

With both the United States, and China, the world's two largest economies, seeing their economic growth rebound, where are the opportunities?

One trade that continues to be appealing from my perspective is shorting the iShares 20+Year Treasury Bond ETF (TLT).

I have written about this extensively, however, to recap, it is my working thesis that bonds made a secular top in 2016, and this is going to have profound investment implications across all investment time horizons, from near term to long term.

The recent secondary peak in bonds coincides with a peak in fear about global economic growth, that I believe is misguided.

Closing Thoughts - A Recession May Not Be Imminent

Almost everyone believes in the lower for longer narrative, and with sovereign bond yields around the world well off their highs, and in the case of Germany and Japan, back into negative nominal territory even on the 10-Year Yield, a lot of negativity is priced in to the financial markets, and this has happened as global economic growth appears to be bottoming, and turning higher.

Commodity prices, led by oil prices, which as measured by $WTIC, are up roughly 37% in 2019 (the United States Oil Fund (USO) is higher by 34% in 2019), are confirming the bottom in global growth expectations, similar to what we witnessed in late 2015/early 2016.

In summary, it remains my view that recent fears about a downturn in global growth, led by a downturn in China, are causing a secondary peak in sovereign bond prices that is occurring right now, however, once this storm passes, the secular turning point in 2016 will be cemented, and sovereign bond yields will have a lot of room to run higher, from their current levels.

Once the bond market rolls over once again, look for a capital rotation, highlighted by a move from growth-to-value, that has a chance to rival, or exceed the capital rotation that took place from 2000-2002.

Bigger picture, fundamentals still do matter, fundamentals were always the wrong scapegoat, and I still believe 2019 is going to be a banner year for value equities, as price discovery, after a decade of growth outperforming value, is poised to return with a vengeance.

To close, even though it has been a very difficult almost decade-long stretch for value-oriented investors, with pockets of significant out-performance, including 2016, I think we are about to enter a golden age for active, value investors, who do the fundamental work, who can find the future free-cash-flow-leading companies, and the most out-of-favor sectors and the most out-of-favor equities, including this recent public write-up, will be at the forefront of this opportunity.

Thank you for taking the time to read this article.

The Contrarian

For further perspective on how the investment landscape is changing, and where to find the 15% and 20% free cash flow yielding companies of tomorrow, and for help in finding under-priced, out-of-favor equities with significant appreciation potential relative to the broader market, consider joining a unique community of contrarian, value investors that have thrived in 2016 and weathered the storm in 2017 & 2018 to become closer as a collaborative team of battle-tested analysts. Collectively, we make up The Contrarian, sign up here to join.

This article was written by

KCI Research Ltd. profile picture
Author of The Contrarian
"Against the grain" investing backed by real-world wisdom and experience
Founder of "The Contrarian", a premium research service, featuring a committed, collegial group that has uncovered a number of hidden gems, hidden in plain sight.  Immensely proud of what our members have accomplished.  Actively investing since 1995, I have soared like an eagle, and been unmercifully humbled by the markets. Achieved positive returns in 2008, and turned an account with $60,310 on 1/1/2009 into an account with $3,177,937 on 11/30/2009. My best years have been 1995-2003, 2008-2012, 2016, 2020, & 2021. My worst years were 2013-2015 & 2017-2019. I believe inflation is coming, and we are at an inflection point in the markets.

Twenty plus year career as an investment analyst, investor, portfolio manager, consultant, and writer. Founder of Koldus Contrarian Investments, Ltd, which was incorporated in the spring of 2009. Dyed in the wool contrarian investor, who has learned, the hard way, that a good contrarian is only contrarian 20% of the time, but being right at key inflection points is the key to meaningful wealth creation in the markets. I believe we are near a meaningful inflection point, perhaps the biggest one yet, for the third time in the past 15 years.

Historically, I have had huge wins and impressive losses based on a concentrated, contrarian strategy. Trying to keep the good while filtering out the bad.

Seeking to run an all weather portfolio with minimal volatility and index overlays to capture my strategic and tactical recommendations along with a concentrated best ideas portfolio, which is my bread and butter, but the volatility only makes it suitable for a small piece of an investor's overall portfolio. The following are a couple of my favorite investment quotes.

"Life and investing are long ballgames." Julian Robertson

"A diamond is a chunk of coal that is made good under pressure."

Henry Kissinger

"Knowledge is limited. Imagination encircles the world." Albert Einstein

I’ve been on top of the world, and the world has been on top of me. I have learned to enjoy the perspective from each view, and use opportunities to persistently acquire knowledge, and enjoy the company of those around me, especially loved ones, family, and friends.

At heart, I am a market historian with an unrivaled passion for the capital markets. I have had a long history and specialization with concentrated positions and options trading. Made money in 2008 with a net long portfolio, deploying capital in some of the market's darkest hours into long positions including purchases of American Express, Atlas Energy, Crosstex, First Industrial Real Estate, General Growth Properties, Genworth, Macquarie Infrastructure, Ruth Chris Steakhouse, and Vornado near their lows. Shorting, hedging, and option strategies also helped me in 2007 and 2009, and these are skills that I have developed ever since I started trading heavily in 1996.I enjoy reading, accumulating knowledge, and putting this knowledge to work in the active capital markets, learning lessons along the way.To this day, I continue to learn, and some of these learning lessons have been excruciatingly difficult ones, especially over the past several years, as I made mistakes allocating capital, including a sizable portion of my own capital (I always invest alongside my clients), to commodity related stocks. While all commodity related stocks have struggled since April of 2011, coal companies, which attracted me due to their extremely cheap valuations, and out-of-favor status (I am a strong believer in behavioral finance alongside fundamentals and technicals) have been the worst investing mistake of my career. The focus on the commodity arena has been the biggest mistake of my investment career thus far, yet in its aftermath, I see tremendous opportunity, even larger in scope than the fortuitous 2008/2009 environment.The capital that I accumulated and the confidence gained in navigating the treacherous investment waters of 2008 gave me the confidence to launch my own investment firm in the spring of 2009, right before the ultimate lows in the stock market. At the time I was working as a senior analyst at one of the largest RIA's in the country, and I felt strongly that the market environment was the best time since 1974/1975 to start an investment firm.

Prior to starting my firm, I was a senior analyst for three different firms over approximately 10 years (Charles Schwab, Redwood, Oxford), moving up in responsibility and scope at each stop along my journey. Since I was a paperboy, I have always had an interest in the investment markets. I love researching and finding opportunities. I was a Chartered Financial Analyst, CFA from 2006-2018. Additionally, I have been a Chartered Alternative Investment Analyst, CAIA. After starting in the teaching program at Ball State University, I switched to a career in finance when I turned a small student loan into a substantial amount of capital. I graduated summa cum laude with a degree in finance from Ball State.

Full disclosure, I am not currently a registered investment advisor, though I did serve in this capacity from 2009-2014, while owning Koldus Contrarian Investments, Ltd. Additionally, I held various securities licenses from 2000-2014 without a single formal complaint filed. At the end of 2014, I voluntarily let my state registration expire, as I transitioned the business to a different structure after going through a brutal business environment, divestiture and difficult divorce and custody battle. Prior to this, I had passed, and held, various securities exams and licenses, including the Series 7, Series 63, and Series 65 exams, in addition to others, alongside the CFA and CAIA designations. Unfortunately, I did not file the proper paperwork to withdraw my state registration, and I did not disclose a personal arrangement, and subsequent civil case, between myself and a former close personal friend and client. This arrangement was initiated informally in 2011, after a substantial period of success, as we aimed to be business partners, and it ultimately resulted in a dispute. I was unaware that I was required to disclose these items, and my securities attorney, at the time, did not advise me to do so. Previously, I had managed a portfolio for this gentleman, and we had taken an investment of approximately $7 million in 2009, and grown it to over $25 million at the beginning of 2012. After a very difficult year of performance, an employee of the firm I owned, and friend, resigned in early 2013, and took the aforementioned client to a competing firm. As a result of not filing the proper paperwork, I agreed to a settlement, with a potential $2500 fine in the future, depending on if I choose to reapply to be a non-exempt advisor. Additionally, while going through the difficult divorce and business dispute and divestiture, I did not file the proper disclosure on two of the annual CFA renewals. As a result, the CFA Institute sought a 3-Year Suspension of my right to use the CFA designation, which I appealed, since the primary investigator in the case sought a 1-year suspension of my right to use the CFA designation for a majority of the investigation. A Hearing Panel heard the case, and went against the recommendation of the CFA's Institute's Professional Conduct Department. Long story short, be careful who you trust, especially when substantial money is involved, and always disclose everything properly, which is hard to do when you are going through difficult situations, as this is the last thing you are probably thinking of at the time. In closing, I have had more experience in the markets, business, and life than most, yet I am grateful & thankful for every day. Additionally, I have learned through success and failures that you have to move forward, and if you can do this, your life will form a rich tapestry of stories.

Disclosure: I am/we are short TLT VIA PUTS AND SHORT SPY AS A MARKET HEDGE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Every investor's situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

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