Regular readers will know that Macro Man has been (incorrectly) fairly sceptical of the green shoots phenomenon and has fought the equity rally (if not position-wise, at least intellectually) for much of the way up. One factor that he almost certainly underestimated, or missed altogether, is that of margins. As a top-down macro guy, he doesn’t really gt his hands dirty with company- or sector-specific margin analysis; he has neither the data nor the expertise to do so.But as a top-down macro guy with a penchant for crafting little indicators, he does have a proxy that he was watched for the last few years to give him a rough idea of what margins are like. Simply put, he looks at the y/y change in US CPI ( a proxy for corporate selling prices) against the y/y change in finished goods PPI ( a proxy for corporate costs.)
To be sure, the proxy isn’t perfect, nor is it intended to be. But it ain’t half bad as a rough-and-ready indicator, as you’ll observe that prior “negative margin” readings have typically coincided with recessions/bear markets/ticking timebombs.
As you can observe, after plunging to record negative territory in H2 of last year (a period that coincided with near-record negative equity performance!), the margin proxy screamed higher earlier this year. Macro Man ignored this signal to his detriment. Today, the margin proxy is stabilizing at relatively high levels which, much as Macro Man may hate to admit it, could suggest upside profit surprises (such as those observed thus far for Q3) if maintained.
Rest assured that he will pay this little indicator a bit more attention in the future; it won’t just be with currencies that Macro Man gets back to his roots.
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