Great Failures

“It was not the common people who were to blame for these failures…”

-Jack Weatherford

 

“Rather, it is the great ones among you who have committed these sins. If you had not committed great sins, God would not have sent a punishment like me upon you.”

 

Don’t worry, I’m not going to go all religious on you this morning. That’s just what Genghis Kahn told the elite of Bukhara after conquering their centrally planned city. “He then gave each rich man into the control of one of his Mongol warriors who would go with him and collect his treasure.” (Genghis Kahn and The Making of The Modern World, pg 7)

 

Maybe Bernanke and his central planning ideologues around the world should do a little summer reading on my man Genghis and reflect upon how plundering the purchasing power of free peoples ends…

 

Back to the Global Macro Grind

 

And over the #Waterfall bonds go. No matter where you think we were last week, here we are – lots of Global Macro tourists who didn’t respect the VELOCITY + VOLUME of the water approaching our bifurcation point (2.41% = the dam) = soaking wet.

 

So, to start, Hedgeye Risk Management will, in #OldWall style, “reiterate” the following Global Macro positions:

  1. 0% asset allocation to Commodities
  2. 0% asset allocation to Fixed Income
  3. 0% asset allocation to Emerging Market Debt and Equity

As the US Treasury 10yr Yield rips through our critical intermediate-term breakout line of 2.41% to 2.60% this morning, everything starts to happen a lot faster. The aforementioned 0% asset allocations were already in motion. We affectionately called Commodities, Bonds, and Emerging Markets #BernankeBubbles for a reason. When they pop, there’s no more flow!

 

If you’ve ever tried suspending yourself in mid-air after living in a bubble that’s popped, it doesn’t end well. Neither does living a centrally planned life where everyone in a so called “free-market” is at the beck and call of an un-elected man named Bernanke.

 

That’s all history now. If you didn’t know that the anti-gravity “smoothing” experiment using the most debt leverage in world history has another side of the trade (deflating debt, commodities, emerging markets, etc.), now you know.

 

There are two big potential drivers of asset deflation:

  1. #StrongDollar (US Dollar Index) from her 40yr low (in 2011 when Commodities and Gold peaked)
  2. #RatesRising at an accelerating rate from the 0% bound

No, it’s not the common people who are to blame for deflation. It’s the conflicted and compromised politicians who have been cheered on by those who get paid by Commodity, Fixed Income, and Emerging Market inflations whose bar tab is up.

 

Deflation? If you inflate a bubble to its max, there will eventually be deflation. And, yes, there will be blood. Deflation is only a bad word if you are long the thing that is deflating.

 

But can our institutionalized world of short-term price performance chasing handle a stronger currency and rising interest rates? Can we handle this thing call a long-term cycle turning?

 

And what would more of the same do to our insecure world?

  1. #StrongDollar (+3.2% YTD) = #CommodityDeflation (CRB Index -5.7% YTD), so more of that would be cool #Consumption
  2. #RisingRates (+48% YTD move in UST 10yr Yield) = bad for anything bonds, and good for my hard earned Savings Account
  3. A massively asymmetric shift in the way we have all been paid to invest and allocate capital for the last decade

In chaos theory, we call a big macro cycle turning a Phase Transition. Leading towards this current point of entropy, there were a series of what we call Emergent Properties warning us of a pending phase transition.

 

Some investors get hurt during phase transitions; some prosper. I have a great deal of respect for Bill Gross and what he has built at @PIMCO, but if you read his last 3 tweets, you can get a sense of who doesn’t win if this keeps happening.

 

Stop whining.

 

It’s time to start winning. The USA has never achieved what all these vaunted elites of economics peddle to you as the desired outcome of all this central planning (real inflation-adjusted economic growth) without a #StrongDollar and #RisingRates.

 

To be clear, there will be pain before we all prosper (that’s why we have been cutting our US Equity exposure for 3 weeks). In the early 1980s and the early 1990s, Great Failures in asset allocation became as readily evident as they are this morning:

  1. Emerging Markets (MSCI EM Index) = -5.6% last week and are now -14.7% YTD
  2. Latin America (LATAM EM Index) = -8.1% last week and is now -20.5% YTD
  3. Silver = -9.1% last week and is now -34.2% YTD

Whether it’s the commodity bubble or the emerging market debt bubble, it’s all the same thing. US Central planners committed the great sin of devaluing the hard earned currency of the American people – and now some have to pay the price for that.  The punishment happens the faster rates rise. And I don’t think The People want to go back to the zero bound all over again.

 

Our immediate-term Risk Ranges are now (new format!):

 

UST 10yr Yield 2.41-2.61%

SPX 1

VIX 16.16-20.45

US Dollar Index 81.21-82.69

USD/YEN Yen 96.54-98.76

Oil (Brent) 100.23-103.73

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Great Failures - ww. cd. waterfall

 

Great Failures - ww. porto


Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more