This note was originally published at 8am on December 18, 2012 for Hedgeye subscribers.
“In the animal kingdom, the rule is eat or be eaten; in the human kingdom, define or be defined.”
If 2012 has driven you right batty, I highly recommend reading the Classical Liberal work of the late psychologist, Thomas Szasz. Particularly in our profession, you have to be proactive in defining your process.
Make no mistake, on #OldWall there was a big business in being perma. There were Perma-Bulls and Perma-Bears. Now, on #WallSt2.0, there are Perma-Risk Managers who understand risk isn’t “on or off.”
Risk is always on. And it moves both up and down, fast.
Back to the Global Macro Grind…
In the animal kingdom (Canadian Junior Hockey), I learned the rule of taking a punch square in the face, fast. In the human kingdom (Wall Street), I’m re-learning the rules every day. Define your process, and evolve it as the game does. The rules are always changing.
In the last week, I hope I’ve been crystal clear in both communicating and acting on what our Global Macro Process has been signaling on global growth. To review 2012:
- #GrowthAccelerating = our call until January 24th when Bernanke imposed his Policy To Inflate (JAN25)
- #GrowthSlowing = our call starting in late-Feb, early March as food and oil prices ripped consumers, globally
- #GrowthStabilizing = mid-Nov to early-Dec, as commodity deflation takes hold, consumption stabilizes
I use hash-tags on #Twitter to hold myself accountable to the #TimeStamps implied by both our Research and Risk Management views. If you follow the Perma-Bull and Perma-Bear guys closely, you’ll notice that they are constantly changing their thesis.
Top down, our Global Macro Process has 3 big factors (our GIP model):
The aforementioned shifts in GROWTH are happening faster right now because that’s what Big Government Intervention does:
A) It shortens economic cycles
B) It amplifies market volatilities
All the while, Keynesian government policy makers are trying their very best to ramp #2 (asset INFLATION) via #3 (POLICY to inflate via currency devaluation).
Japanese bureaucrats are so impressed by what Bernanke appeared to have achieved at the September 2012 highs (3% higher in the SP500 at 1474, where inflation slowed growth), that they just convinced their people to burn their currency at the stake. For that, the Nikkei is +14.6% in the last month, but real (inflation adjusted) Japanese growth is slowing.
If POLICY makers of the Keynesian Kingdom want to really get this party started, they should go full Krugman/Chavez on these markets. Then Perma-Bulls will really be right for all the wrong reasons (after torching their currency, Venezuela’s stock market is up +305% YTD).
Back to the process, the asset allocation, net exposure, and sector moves we have made in the last month are as follows:
- We’re net short commodities and commodity related equities
- We’re net long consumption and consumer related companies profiting from commodity deflation
- We cut out asset allocation to Fixed Income to 0% on Friday
To be clear, before I rile up pension funds, this is how I think about asset allocation with my own money. Since I can (and often do) go to cash, I have no problem selling something down to 0% if I think the asset class and/or security has a rising probability of a draw-down.
Always remember Rule #1 – don’t lose money (Buffett, pre being politicized).
From a Risk Management Process perspective, this is where my multi-duration signals play a huge role. When something signals bearish TRADE and TREND (like US Treasury Bond Yields did last week), and the Global Macro Research Process confirms it, I sell.
I also buy things when they are immediate-term TRADE oversold (bought AAPL $502.50 yesterday), but that’s a different risk management strategy, on a shorter-term duration. Our longer-term risk management decision was to sell APPL on September 28th.
In a profession where I see less and less people who actually know what it is that they do, I think there is a tremendous opportunity for all of us to evolve and attempt to explain what it is that we do. People want to trust us – and we don’t need animals eating us.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, AAPL, and the SP500 are now, $1685-1709, $105.95-108.94, $3.64-3.71, $79.36-79.99, $1.29-1.31, 1.69-1.80%, $501-532, and 1419-1436, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer