This note was originally published at 8am on March 13, 2013 for Hedgeye subscribers.
“Keep away from people who belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great.”
The quote at the top of this note is certainly true for my experiences in life. Every time I have met someone who has truly succeeded, whatever their domain, I’ve noticed they do their best to encourage others on the path to success. In the past week, I had a very good example of this when I met Senator John McCain.
Now setting aside your political affiliation, I think it is fair to say McCain has been one of the more successful politicians of this generation. In this instance, I met him briefly in a small T.V. studio as he was going on to do a clip for CNN and I was waiting to go on for CNBC. As we waited, he wolfed down a bag of chips, hopped on and off various calls, and planned out his town hall appearance in a small Arizona town for later in the day.
So, yes, at 76 years of age and after 26 years in the Senate, McCain is still grinding. Therein lies the point of greatness and great people, they understand that the path to success is based on hard work and repetition. Investing in the public markets epitomizes this idea.
The one market that has belittled us as of late is China. Chinese equities remain one of our top long ideas, but as my colleague Darius Dale wrote in an update on the idea on Monday some of the recent economic data from China does give us pause. Specifically, industrial production, fixed asset investment and aggregate financing (a driver of money supply) were marginally below expectations and saw sequential declines.
Now to be fair, many of these economic metrics are showing year-over-year growth rates, that relative to the rest of the world, are outstanding. In the Chart of the Day, we highlight this by showing Chinese Fixed Asset Investment for the last three years. As the chart shows, in the most recent period fixed asset investment was up 21% year-over-year and remains well off its lows.
As it related to fixed asset investment in China, as the chatter out of China over night is that Shenzhen may implement a price cap at every housing project within 2013. This pressure on Chinese property stocks was then compounded by the fact that Governor Zhou of the People’s Bank of China said he is on “high alert” in regards to inflation. So the belittling point on China is that while growth remains relatively strong, the outlook for inflation and policy (the other two key factors in our country models) are more belittling to discern.
An investment asset class that has been less belittling for us to analyze recently is gold. Yesterday, my colleague Christian Drake wrote a note titled, “Gold: Anatomy of a Breakdown”. The breakdown of gold has been a key asset call on the back of our view that global growth is stabilizing. This hasn’t been a popular call as many institutional investors have been over allocated to gold based on the idea that as growth decelerates, expectations for future QE rise, the dollar depreciates and investors flock to gold as protection against further dollar debauchery.
The reality of the interplay above is that both the dollar and gold are large driven by economic data versus expectation and the view of future monetary policy. As the note emphasized:
- Gold versus Federal Reserve Balance Sheet: The correlation between Gold and the Fed’s Balance Sheet is strong across durations with an R^2 = 0.92 over the last 14 years. If you think this relationship makes common and economic sense (we do), a deceleration and unwind of policy (or the expectation for) on the back of an improving growth outlook is a decidedly bearish catalyst for gold;
- Gold vs. Dollar: Gold’s Inverse correlation to the dollar has been moderate-to-strong across durations. Gold is levered to the USD directly given that gold generally settles in dollars, and indirectly via expected inflation and policy impacts on fiat currency value. Correlations aren’t perpetual – they build and decay - but when they start to tighten alongside other relevant/corroborating factors, it’s generally worth paying attention. Gold’s 30D correlation to the dollar is currently -0.90;
- Gold - CFTC Data: Bullish Speculative positioning looks like its capitulating as net length in combined non-commercial futures & options contracts has collapsed since November. It hasn’t paid to speculate on the end of the world (again) as extremes in bullish positioning (>1STDEV) have been followed by negative subsequent price performance in gold 100% of the time over the last year. Net length is currently down ~62% from the late 2012 highs; and
- Gold ETF Flows: Gold flows to the GLD and ETFs in aggregate, have rolled over since the beginning of the year and have accelerated to the downside over the last month. For example, total Gold Holdings in the SPDR Gold Trust (GLD) are down ~114 Tonnes (-8%) from peak 2012 levels according to Bloomberg data.
The summary of the points above are that gold will go down for exactly the same reasons it went up – slow growth and loose monetary policy. So if the dollar continues to strengthen and growth continues to stabilizes, the record outflows from gold ETFs will only continue. Thus as Mark Twain wrote:
“Moralizing, I observed, then, that "all that glitters is not gold."
Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1569-1604, $109.02-110.78, $82.36-82.97, 93.76-96.82, 1.96-2.09%, 11.21-13.83, and 1538-1565, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research