“You hold in your hands, the future of the world.”
Not to be confused with someone who does math (his famous cousin and mathematical genius Henri Poincare), Raymond was a lawyer turned politician. In France, that’s a potent mix. Poincare was President of France from 1.
The aforementioned quote is a friendly reminder that politicians have always thought that they can control your life. It was part of Poincare’s speech that officially opened the Paris Peace Conference in 1919. (Paris 1919: Six Months That Changed The World, pg 62)
Setting aside the fact that the Russians weren’t even at the conference, the comment reeks of the kind of political hubris that scares people. Today’s French President doesn’t scare me, but the people advising him and the President of the United States on economic and monetary policy do.
Back to the Global Macro Grind…
I was spending time with clients in Pittsburgh yesterday and throughout the day I kept coming back to the conclusion that the biggest risk to the rally in US stocks is an un-elected central planner who has built a series of unintended consequences into our risk matrix.
Un-elected and un-accountable – his name, by the way, is Ben Bernanke. He isn’t a chaos theorist or mathematician either. Bernanke, like most Keynesian central planners who have never traded Global Macro risk in their life (actually Keynes did and lost 90% of his capital speculating on commodities in the late 1920s), fundamentally believes that he can bend and smooth gravity.
Markets obviously couldn’t care less what he thinks about defying the laws of physics. We’ve often used the thermodynamic metaphor of The Waterfall. Funds that have flowed into what appeared to be a calm and steady river of yield chasing and fixed income oriented securities are now approaching the point of entropy. A breakout in Treasury yields looks like Niagra Falls to me.
Most free market clients agree with me on this: A) we like gravity but B) we’re leerier when it happens to the anti-dog-eat-dog, anti-economic gravity, crowd fast! It’s all about the speed of the water (yields rising) now and there are a series of real-time risk management signals we are monitoring for velocity:
1. US Dollar - #StrongDollar breakouts across intermediate and long-term durations have always front-run central planners and growth bears alike in this country. There has never been a sustainable US economic recovery (think 1 and/or 1) when the US Dollar didn’t rip alongside economic growth ripping. Treasury Bond yields rose, in kind.
2. Gold and Oil – these are coincident and highly correlated (on an inverse basis to the US Dollar) real-time signals that anyone with macro historical context (that goes beyond a 5-10yr chart) will acknowledge as pro-growth signals. Gold hates growth. Falling Oil prices perpetuate US #GrowthAccelerating. So think about falling oil as entropy. #Speed
3. US Treasury Yields – since Bernanke has opted to attempt to suspend economic gravity by marking the US Yield curve to model (not clear if he learned this from Tricky Dick Fuld or not), his decision to “taper” (whatever that means) is the equivalent of trying to smooth the flow of the Teton Dam on this day in 1976.
Huh? Yep, today in 1976, the Teton Dam collapsed. Big man-made structure built on false premise, evidently, too. Sound familiar? Engineers started to notice the dam was leaking ahead of time (the pool of “steady state” water was rising – real subtle hint!). And then boom! #Waterfall
To stay with the metaphor, the leaks are both economic data points and real-time market reactions to them. As US employment, housing and consumption data build the water level of, god forbid, rising growth expectations – both the dam and the government itself starts to leak.
Bernanke calls his leaks “communication tools”, or something like that. Since I don’t do the inside information thing from “consultants” in Washington, I depend on my engineers (analysts) who spend their time measuring crazy things like velocity, convexity, etc. at the proverbial dam’s bifurcation point.
Just to give you some key water levels on that:
- 2yr US Treasury Yield TAIL risk line = 0.27%
- 10yr US Treasury Yield TAIL risk line = 1.85%
- 10yr Japanese Government Bond TAIL risk line = 0.89%
So, you don’t have to be Raymond Poincare’s cousin or Albert Einstein to understand what is already happening here. And that’s the point – it’s already in motion folks – and if you want to try to arrest the speed of the decline of a waterfall (one that’s been bubbled up for say, 30 years, in this case) with your hands, you might want to dial up God himself for this one.
Because Bernanke’s political hands aren’t going to work.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX and the SP500 are now $1, $100.35-104.29, $82.46-83.51, 98.76-103.06, 2.08-2.22%, 14.17-16.93, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: We shorted oil (OIL) at 12:00PM at $21.86. We also shorted gold (GLD) at 2:33PM at $135.09.
We've been waiting patiently for an immediate-term TRADE overbought signal to re-short oil on - here it is. Oil’s bearish TREND remains courtesy of #StrongDollar. As for gold, it remains mired in a Bearish Formation after failing at $1424 immediate-term TRADE resistance yesterday. We remain The Gold Bears. Bullish on Growth.
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Takeaway: A quick look at some of Keith's top tweets today.
@KeithMcCullough 2:41 PM
Treasuries still act like death; bond yields breaking out is a pro-growth signal
@KeithMcCullough 2:39 PM
@KeithMcCullough 2:22 PM
I realize that some of you will feel uneasy being part of a cult, but wearing the frayed jorts is mandatory
@KeithMcCullough 9:28 AM
Just a friendly reminder to the housing bears - you said y/y US Home prices would be up +5-6%- already running 2x that
@KeithMcCullough 8:59 AM
Takeaway: The chart below suggests caution is in order for Caterpillar longs.
For CAT longs, the renewed slide in iron ore prices should be a cause for concern.
Recently, iron ore has been a key correlate for the relative performance of shares, as iron ore mine expansions are a major end-market. We believe CAT and other capital equipment suppliers to resource-related industries are in the midst of a long and significant decline in demand as resource capital spending returns to normal (i.e. not far from depreciation) levels.
Takeaway: Corelogic HPI data for April/May showed housing's parabolic recovery remains ongoing. Household net wealth set for new highs in 1Q13.
Yesterday we highlighted the expedited back-up in mortgage rates as an emergent headwind to the sustainability of housing’s accelerating recovery. While higher rates do represent a drag on affordability, in the more immediate term, housing’s momentum is showing no signs of deceleration.
This morning’s Corelogic Home Price Index showed home prices accelerating to +12.14% Y/Y in April with the Preliminary May estimate reflecting further acceleration to 13.2% Y/Y. Moreover, the M/M Home Price changes observed in April and May represented the fastest rates of appreciation in the last 20 years, inclusive of the 2004-2006 bubble period. In short, the recovery in housing remains almost perfectly parabolic at present.
Relatedly, ongoing home and financial asset price re-flation continue to drive the Household balance sheet recovery and should serve to further support consumption as the wealth effect increasingly manifests (see Here for fuller discussion of housing’s wealth effect) alongside rising confidence and domestic labor market strength.
Collectively, Real estate and Equities (Corporate Equities & Mutual Fund shares), represented ~44% of Household assets as of 4Q12 and have appreciated ~10% and ~12% year-over-year in 1Q13, respectively. Given the magnitude of Q/Q and Y/Y real estate and financial asset appreciation, even under aggressive assumptions for growth in Household liabilities, the Fed’s Flow of Funds report scheduled for release on Thursday should reflect further acceleration and another new, nominal high, in Household Net Worth in 1Q13.
In addition to driving some manner of wealth effect, the strengthening of the Household balance sheet and rising net wealth are supportive of credit expansion, on the margin, as household capacity for credit increases alongside rising collateral values. A positive change in the flow of net new credit would provide an incremental tailwind to consumption growth as well.
We’ll follow up with any notable highlights from the Flow of Funds release on Thursday.
Christian B. Drake
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