The Global Economic Impulse
The Global Economic Impulse
2022 was a tough year for all kind of asset class. The first half of 2023 is set to be as bad as economic data are worsening across the board. Only a Fed pivot would change anything.
First, let me wish you a glorious and happy new year for 2023. May health, happiness and wealth be yours in 2023.
2022 was a rough year across the board. The energy crisis obviously benefited energy producers. Apart from that, every single sector got smashed in 2022, with crypto taking a real beating.
Gold performance was surprisingly low in such a high-inflation environment, however, the strength of the dollar was such that gold's performance was actually very good. A look at its performance in other major currencies gives a more accurate illustration of how it performs in times of high inflation.
In 2022, combining global stocks and bonds, $45 trillion of market value (at the trough) was erased. That is roughly twice the US GDP…
To be fair, though, it represents a correction of “only” 25%; there is room for more…
That was enough for the net worth of US households to contract for the first time since 2008, and only the fourth time in seventy years…
2022 was bad, but 2023 could be worse — at least for the first half of the year — as you are going to see in the charts we are sharing with you today.
A quick word
Before showing you why we think the beginning of this year will be complicated, let me tell you a short story about what we do at The Mad King.
For over a decade, our job has been to use charts to tell stories so our clients can use them within their investment frameworks.
When done right, this is a very efficient way to gather important information and, more importantly, to pass on this information to empower your financial decisions.
The idea is not for us to make bold predictions; our egos don't crave this. It is to give you what we think are the best tools to understand, navigate, and — when the time is right — to invest in the financial markets.
Over the years, we have acquired the skills necessary to create and utilize a comprehensive set of charts. The Mad King aims to pass on this knowledge on to you.
Here are some stats, to help you appreciate the depth of our database:
We cover all asset classes:
Fixed Income / FX / Equities / Commodities / Real Estate / Risk Assets)We cover the 30 largest economies (and more when needed)
We divide each country into different sectors:
Economy / Manufacturing / Trade & Transport / Inventories / Housing / Monetary & Debt,
Employment / Retail & Consumption / Fixed Investment / SentimentWe have data sets categorized in themes:
Technology / Central Banks / Manufacturing / Demographics / Oil, and more…)We have our own proprietary data sets
+2,000 charts and counting
You have heard the saying “A picture is worth a thousand words”. Replace the word picture with chart, and you will understand why our work may be important to you.
Don’t get me wrong; it is not only about the number of charts you have in your database — that would also be too easy. It is about how you connect those charts to tell a compelling story, and we can confidently affirm that this is our experience, strength, and passion.
You can write any narrative you want, but when using charts you can’t lie, because the data doesn't lie. When you know how to use the data this way, you realize you have in hand a very powerful tool.
We use the business cycle a lot in our framework (you’ll grasp that in the coming pages). We will explain in detail in the coming weeks why we do so.
We also use demographics and technology trends, which mesh perfectly with one another.
Today we will introduce you to our proprietary “Economic Impulse Indexes” chart set.
About Our “Economic Impulse Indexes”
As a new year starts, we like to look into the economic pulse to evaluate where we are. Today we share our personal set of proprietary economic impulse indexes built using diffusion index formulas.
Diffusion indexes measure the breadth of economic data changes within a specific sector or country. They are very useful for quickly assessing the overall state of an economy or a specific sector.
Before we dive in, let us explain briefly what follows.
Our indexes are built by collecting thousands of different data series.
They are divided into three major categories: MACRO, MARKETS, and OVERALL.
The MACRO category includes (so far):
Leading indicators, PMI, retail sales, auto sales, headline CPI, core CPI, headline PPI, GDP QoQ%, GDP YoY%, unemployment rate, industrial production, capacity utilization, housing prices, building permits, exports, and imports,
The MARKETS category includes (so far):
Central banks, US Treasury holdings, bonds, gold reserves, equity, and the MSCI index.
The OVERALL category includes (so far):
A US index combining more than 100 data series and a global index combining nearly 900 data series!
We have collected data worldwide from reputable sources for each category mentioned above. To give a concrete example, we have compiled data from 45 countries for macro retail sales, 85 countries for equity, and 80 countries for GDP. Available datasets vary by category: Sometimes, we will have 30 data sets and sometimes nearly 100 —obviously, the more, the better.
We compiled all the data into one indicator representing the country for the OVERALL section. We will have more countries available in the coming months, but for the moment, the US index is built up using 104 data series and the global index using 871 data series.
Disclaimer: The economic impulse indicators presented are for informational purposes only and should not be used as a benchmark for making financial decisions. The data and analysis provided are based on various sources believed to be reliable, but their accuracy cannot be guaranteed. Economic indicators are subject to change and may be affected by various factors, including market conditions, government policies, and global economic conditions. The information provided is not intended to be a forecast or prediction of future events, and it should not be relied upon as such. It is important to consult with a financial professional before making any financial decisions.
MACRO
Most OECD economies have declining leading economic indicators (LEIs), and we have yet to see a peak. In a nutshell: LEIs have not bottomed yet…
2023 is facing the most-anticipated recession in history; to me, it looks like we are already in it!
A large majority of countries still have declining retail sales. This weakness should impact GDP for Q4 ‘22 and Q1 ‘23…
The number of countries with auto sales declining is on the rise. Again, if this trend is confirmed, it should impact GDPs…
High inflation has been the hot topic of 2022. Now the peak is clear, and inflation is rolling over globally. That change will take a few months to materialize in the data, though…
Core CPI is a bit stickier, as it takes longer for durable goods and large item prices to come down than for food or energy ones to do so…
The good news is, PPI globally is declining fast, and we should start to feel the effect of this fall in Q2…
The trend in quarterly GDP confirms what we expect, based on the retail sales data. It looks like we are going to have a large number of countries with decreasing GDP in Q4 ‘22 and Q1 ‘23 — short-term pain….
The story when looking at yearly GDP is slightly different. It looks like the number of countries with falling yearly GDP will be reduced in the coming months. This means that quarterly GDP may decrease but not too much…
The unemployment rate is rising globally, and rather quickly…
And by the way, our unemployment impulse leads US unemployment by three months. Get ready for more headlines similar to the one about Amazon cutting 18,000 jobs…
Industrial production is declining across the board…
With so many countries experiencing declining industrial production, it seems logical that capacity utilization is also falling and will likely get worse, as it is now far from its usual peak range.
Since 2008, the number of countries with rising house prices has constantly increased, but it looks as if global house prices have topped…
Our next chart shows the inverse: declining house prices. A bottom has formed; I would expect the percentage of countries with falling house prices to increase in 2023.
Abroad decline in the number of building permits, combined with falling house prices (above), suggests that 2023 might be a tough year for the real estate sector.
The number of countries with declining exports is increasing rapidly.
And based on the correlation with ISM, the situation should get worse in the next six months.
The number of countries with declining imports is increasing rapidly, but rather more slowly than those with falling exports.
We have more data reflecting declines than we do data reflecting improvements, suggesting that the beginning of 2023 should be challenging.
MARKETS
Equity is the category people will be the most interested in. I am afraid equities will go sideways until central banks pivot and liquidity comes back. However, once we have a clean peak on this chart (above 80%), it might be a good time to enter the stock markets again, depending on the macro data, of course. With a recession right around the corner, we can expect more countries to have falling stock markets first.
Ditto for MSCI indexes.
This is going to be the story for 2023: The central banks’ expected pivot!
Central banks went full-on with their hiking cycle in 2022; it is just a matter of time before we have a clean reversal…
The Fed hiking rates so aggressively has spooked foreign US bondholders. As a result, 75% of foreign US Treasury holders are selling their bonds. As the Fed pivots, this trend should reverse and will set US bonds to rally.
Short-term bonds have been obliterated because of the hiking cycle….
Ditto for 10-Yr bonds…
OVERALL
Although the US economy has bounced, that bounce hasn’t been high — only 41% of the economic data in the US is improving, and overall it remains at levels seen during the last three recessions.
Our US economic impulse (105 data series) index is tracking ISM extremely well, making ISM a great proxy for the entire US economy. I will cover the importance of the business cycle and ISM in our Genesis piece to be published this month.
Globally, it looks like economic data will be worse for the next few months….
And the index remains far from levels reached during a recession. Since we expect a recession, if we are not already in one, it makes sense to expect the data to worsen over the coming months.
Here is some black magic! Our global impulse index is basically the ISM!!!
The correlation of our global index with ISM is very tight. As a reminder, our index combines 871 different data series. ISM leads by five months.
The S&P 500 is already pricing global economic weakness for Q1; if the weakness persists, we can expect the S&P 500 to correct further.
Executive Summary
Based on these economic impulse indexes, the setup is clear as to what we can expect for the first part of the year.
Macro
The leading indicators suggest that we are already in a recession.
Global retail sales are slowing down.
Inflation is coming down.
Weak quarterly GDP.
Rising unemployment.
Manufacturing is slowing down, with industrial production and capacity utilization set to decline.
The housing sector is still digesting high yields and is slowing down, with house prices and building permits declining.
Exports and imports will decline in the coming months (but they lag the manufacturing sector).
Markets
Central banks are going to pivot in 2023.
Foreigners will purchase US bonds.
2-Yr and 10-Yr bonds will rally.
Stocks might have bottomed, pricing the coming weakness for Q1 and front-running a Fed decision.
Overall
Global economic data is going to weaken further.
US economic data is going to weaken in Q1.