This note was originally published at 8am on June 19, 2013 for Hedgeye subscribers.
“Start slow, and taper off.”
If I was Ben Bernanke today, that’s what I’d tell the world I am going to do. US consumption, employment, and housing growth supports a slow start to tapering. So does the Russell 2000 closing at an all-time high of 999 (+17.7% YTD) yesterday.
As we often remind history buffs, all-time is a long time, and there comes a time (within all-time) when things start to change. Gold and Treasuries have already been front-running Bernanke on this. All-time lows in US Treasury rates are ending.
The beginning of the end of Bernanke’s financial market “innovations” is a good thing. I think most people in this country are tired of listening to politicians preface the need for their interference in our lives and markets with “what would have happened” if they didn’t save us from the problems they perpetuated. That’s now half a decade ago. Get over it.
Back to the Global Macro Grind…
I spent the entire day meeting with our Institutional Clients in San Francisco, California yesterday. And I don’t know if it was something in the air (gorgeous day) or what, but investors down here are a lot more chill about the end of QE than some folks on the East Coast.
In most meetings, it seemed like a generally accepted reality that A) tapering expectations are in motion and B) this is potentially a pro-growth signal. In other words, tapering is becoming yesterday’s news. The next debate is about tightening.
Oui, oui, mes amis. This is what happens after the tapering – the tightening. And since every measure of consensus you can consider is not considering a Federal Reserve rate hike, that’s what my sharpest clients were asking me about; not what Liesman rehashes today.
Six months ago, consensus didn’t expect a tapering decision at the June 2013 Fed meeting. We did. That’s why we have 0% asset allocations to Commodities and Fixed Income.
The fundamental view wasn’t based on getting a whisper from a Washington “consultant.” It was based on the following forecast:
- US Dollar was going to stabilize and strengthen from Bernanke’s burning 40 year lows
- Commodity Prices would deflate from their 2011-2012 all-time highs
- US consumption, employment, and housing growth would enjoy that and surprise to the upside
That’s not a victory lap. That was just our call.
So the question now is where will we be 6 months from now?
- Will the US Dollar continue to make a series of higher-lows and higher-highs?
- Will Commodity Deflation remain a 2013 reality?
- Will the US Housing and Stock markets continue to add to their double digit YTD gains?
I think that if Bernanke starts slow and follows through with tapering through the fall, Americans will be ok with that. And when I say Americans, I mean the 95 to 99% of us who want:
- Down Oil prices
- Appreciating home and equity prices
To be clear, the dudes who are riding the Bernanke Zero-Bound train (long Mortgage Backed Securities, Gold, Treasuries, MLPs, and whatever else it was that he jammed yield chasers into like mashed potatoes into a garden hose), do not want this.
But what % of the population cares about being long unproductive assets likes Gold (or depleting assets like an Oil and Gas MLP) and selling ads on Sirius satellite radio about the end of the world anyway?
The sad reality is that the 1-5% of Americans who need the #EOW (end of world) trade to work probably control 50% of the airtime. Oh, and by the way, they also get paid to fear-monger. That’s why their ratings suck. America gets it. We are the silent majority that tweets loudly on mute.
Our natural intuition is to prosper and grow. We all know that waiting on the whim of a central planning overlord’s whispers about tapering is no way to live. It’s time to tighten our belts, hold ourselves to the future’s account, and stop fighting the last 5 year’s war.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Nikkei, and the SP500 are now $1361-1389, $104.55-106.64, $80.31-81.21, 93.27-96.17, 2.09-2.29%, 14.62-18.64, 12371-13641, and 1631-1669, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer