This note was originally published at 8am on June 03, 2013 for Hedgeye subscribers.
“He made brilliant use of speed and surprise on the battlefield.”
In Genghis Khan And the Making of The Modern World that’s how Jack Weatherford characterized the self-made boy (Temujin) who became the man (Genghis Kahn) on his battlefield for liberty and freedom from aristocratic rule.
“Year by year, he gradually defeated everyone more powerful than he was… Genghis Kahn conquered more than twice as much as any man in history… In American terms, the accomplishment of Genghis Kahn might be understood if the United States had been founded by one of its illiterate slaves who by sheer force of personality, charisma, and determination liberated America from foreign rule.” (Introduction)
Needless to say, I am loving this case study in human history. We aren’t all Keynesians yet.
Back to the Global Macro Grind…
Got speed and surprise? How about that move in the last few hours of trading on a summer Friday into month end? With the US stock market down -1.4% on the day (only -2.3% from its all-time high), the US stock market bears claimed victory over the weekend.
Winning a no volume battle doesn’t mean they’ve won the war. Ironically enough, it was US #GrowthAccelerating to the upside (again) on Friday that drove the Fed fear (PMI 58.7 vs 49 last month and US Consumer Confidence hitting another new YTD high).
Context is always critical. To put the 2 hour selloff in perspective, this is what happened to markets in May:
- SP500 +2.1% to +14.3% YTD
- US Financials (XLF) +6.1% to +21.1% YTD
- Utilities -9.1% to +7.9% YTD
In other words, May was the best month of 2013 to be long US #GrowthAccelerating, and short the #GrowthSlowing trade.
To review why getting the slope of growth (accelerating or decelerating) matters to markets:
- When Growth Accelerates, Treasury Bond yields rise – Gold and low growth (high yield chasing) Equities weaken
- When Growth Decelerates, Treasury Bond yields fall – Gold and low growth (high yield chasing) Equities strengthen
And the speed really catches the growth bears by surprise when inflation slows as growth accelerates.
On that score, for 2013 YTD:
- #StrongDollar = +4.4%
- #CommodityDeflation (CRB Index) = -4.5%
Reminder - the highest multiples ever paid for US stocks have occurred when:
1. Growth is accelerating
2. Inflation is slowing
That was the mid to late 1990s. US Consumption Growth was ripping alongside #StrongDollar and then people ultimately paid way too much for the growth that became more a perception than a reality.
But there was speed and surprise coming out of the 1991-1992 recession too don’t forget. And, from a US economic cycle perspective, today is a lot more like 1992 than 1999.
During Clinton’s presidency, here’s what the American people had:
- Average US Dollar Index price of $97.89
- Average price of Brent Oil of $19.69/barrel
- Average pace of US GDP +3.5%
That last part of the equation is what I really care about next. What will the speed and surprise be on the downside for prices at the pump? Last week, the price of Brent Oil (lead pump prices by 3-4 weeks) dropped another -2.5% to -9.9% YTD. Alongside a ripping consumer confidence report from the University of Michigan in May (new YTD high), what did we hear from bears about that?
US Consumption bears (@DougKass) being rattled don’t matter as much as the speculators in the Oil markets. Last week’s CFTC (futures and options) data finally showed the 1st downtick in net long oil contracts since April 23rd. Oil bulls don’t like the idea of Bernanke getting out of our way either. There’s still a +217,531 net long position to burn off in Oil. Oh what a #TaxCut for consumption that would be.
I’m tired of our conflicted/compromised governments getting paid to burn our currency. Getting Bernanke out of the way is the most misunderstood bullish catalyst I can think of. #StrongDollar is already sniffing that out. There are huge benefits. It will pulverize the bubbles Bernanke has left – two of the biggest ones being Commodity Prices and 0% you earn on your hard earned savings accounts.
“As he smashed the feudal system of aristocratic privilege and birth, he built a new and unique system based on individual merit, loyalty, and achievement… Genghis Kahn insisted on laws holding rulers as equally accountable as the lowest herder … (Introduction, pg xix)” and with more speed and surprise, the American People I know best will surprise governments and bears on growth too.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1354-1410, $100.27-102.95, $82.91-83.79, 100.27-103.34, 2.06-2.19%, 14.27-17.21, and 1624-1653, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer