This note was originally published at 8am on May 02, 2013 for Hedgeye subscribers.
“Certainty does not necessarily hold for unstable systems.”
Markets and economies are unstable systems. They could be less unstable if governments just left them alone – but that’s not going to happen, so Embrace Uncertainty. By changing a few words in a FOMC or an ECB statement, a central planner can change your life.
For the growing base of the gainfully employed trying to sell you certainty, I am becoming the anti-christ. I kind of like that. My team’s work is grounded in history (context), math (process), and evolution. Government forecasters are more like Newtonian navel-gazers.
The biggest risk to Bernanke (Fed), Draghi (ECB), and Kuroda (BOJ) policies isn’t the policy itself; it’s the expectation embedded in their forecasts that drive those policies . No one actually trusts that these guys will ever get it right – we’re all just trying to front run them.
Back to the Global Macro Grind…
“When a system is orderly (that is, low in entropy and rich in structure), more can be known about that system than when it is disorderly and high in entropy” (Cosmic Evolution, pg 49). That’s a great way to characterize what the modern day market system is not (orderly).
Expectations drive volatility. Unless you are the guy on the other end of the phone getting inside information on a central planner’s next big move, there is nothing orderly about market expectations. Everything can change, fast.
For now, the only thing that’s been changing really fast (down Gold, Oil, etc.) is the expectation that Bernanke is going to be able to devalue the dollar in perpetuity. That expectation has two big year-over-year parts:
- ABSOLUTE – both US fiscal and monetary policy expectations are tighter, on the margin
- RELATIVE – both ECB and BOJ fiscal/monetary policy expectations are looser, on the margin
And, unless the collective consensus that is America’s new transparency/accountability/trust transmission mechanism (Twitter) fails at demanding more of what has been working in the US economy (and at the pump, and in the stock market, and in terms of home price appreciation) for the last 4 months, I expect to see more of the same on those two big parts throughout the coming months.
Remember, this isn’t like the April/May ‘sell and go away’ calls that Hedgeye has made, literally, every year for the last 3 years (2010, 2011, 2012 #timestamped). The spring/summer of 2013 is more like 2009 where:
- Q109 #StrongDollar drove #CommodityDeflation (lower prices at the pump into the spring/summer into Q209)
- Consumption #GrowthAccelerating (from Q109 to Q2/Q3 2009) when consensus didn’t expect it
Our proprietary Hedgeye GIP (Growth/Inflation/Policy) Model has not changed since 2008. That’s why we were as bullish in March of 2009 on the US Consumption #GrowthAccelerating front as we are now. Competitively speaking, the good news is that Old Wall’s models didn’t change either.
What was different in 2010, 2011, and 2012 (coming out of Q1 versus 2009), wasn’t our model – it was what makes an already (and endemically) unstable market system more unstable – incremental government policy expectations (ie. multiple QEs).
In each of the last 3 years, Bernanke imposed a Dollar Devaluation Policy on global market expectations in Q1:
- Inflation expectations then rose, sequentially, from Q1 to Q2
- Markets front-ran the Fed, chasing food/oil prices higher from Q1 to Q2
- And, rising inflation (sequentially) slowed real inflation-adjusted consumption growth
Then… the Fed’s finest, in their vigilant pursuit of selling their employers (politicians) “stability” and certainty, had to whisper sweet nothings to the old boys throughout the market swallows of the summer. Then… ta-dah… another QE coming out of Jackson Hole… markets (especially Gold) ripped… economy did nothing… etc. etc. etc.
Unfortunately (for him), that’s all Bernanke’s historical baggage to deal with now. I’m personally done with the guy. Away from some family weddings, the best news of my 2013 summer is that he’s not going to be in Jackson Hole this year.
When I read yesterday’s FOMC statement, I breathed a sigh of relief. My life is uncertain enough. Having a little more certainty that this man is going to be doing nothing for the next little while made me sleep easier. I hope it did the same for you too.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1374-1483, $98.41-103.92, $81.42-82.53, $1.29-1.32, 97.11-100.53, 1.63-1.73%, 12.91-14.96, 918-955, and 1576-1605, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer