Big Worm, played by Faizon Love, is the neighborhood drug dealer in the 1995 movie Friday. Big Worm weighs over 300 pounds and sports a head full of curlers. And as it turns out, Big Worm has a couple of insightful quotes in the movie that can help us as we try to make sense of the markets that are in front of us now.
In an exchange with Smokey, played by Chris Tucker, about late payment, Big Worm explains “I had to warn you too many times about my money…You see, it’s the principal. There’s principalities in the whole thing.”
When it comes to US economic growth, there are certainly “principalities” in the whole growth “thing.”
Because GDP is reported on a severe lag, it is important to dial into aspects of the market which can tell you what’s currently happening with US growth. Historically, the strongest economic times in this country have been accompanied by a strong US dollar and elevated or rising interest rates. This was the environment in the US in late July 2012, when interest rates bottomed and started to rise.
Watching the US Dollar
The US Dollar (USD) had already bottomed in late February 2012 and was on the rise. The USD has gone on to trade at 10-year highs and US Yields, although still in a multi-decade downtrend, are still trading well above the lows of 2012.
The corresponding US economic growth has been a quarter-over-quarter acceleration in the annual GDP growth rate from Q2 2013 through Q1 2015. So far in 2015, annual GDP growth has decelerated each quarter since peaking in Q1 at 2.9%.
This slowdown in growth has been accompanied by a downtrend in US yields, which peaked in the early summer and a downtrend in the US Dollar, which peaked in mid-March. While there is no such thing as a Holy Grail or ‘sure thing’ in the world of trading, looking at USD, US yield and a couple of other select markets can give you a vantage point on GDP growth in real-time.
Your mission, should you choose to except it, is to find data points, markets or sentiment indicators to better help you understand what is currently happening. Most investors are either trying to forecast what is going to happen in the future or they’re preoccupied with what happened in the past.
You can give yourself a trading edge if you focus your energy on getting better at understanding what is happening right now.