This note was originally published at 8am on June 20, 2013 for Hedgeye subscribers.
“I wonder how much it would take to buy a soap bubble, if there were only one in the world.”
The last of the central planning bubbles left in the world is now popping. It’s called the bubble in super sovereign debt.
Everything else that’s imploding this morning was already popping. That’s not new news.
Gold crashing today isn’t new news either. It’s called capitulation.
Back to the Global Macro Grind…
Our Waterfall metaphor was right because the big macro factors signaling this move in bonds was measurable. As both the VOLUME (of debt) and VELOCITY (rates rising) started rising at a faster rate, you could see Bernanke’s policy decision approaching the dam.
And no, it wasn’t a sign to buy the damn dip. At least not in Gold or US Treasuries, that is…
I don’t think it’s helpful to give you live quotes and/or pictures of this bifurcation point in Global Macro market history. Neither do I think you need me to rant and/or remind you on why we saw this Waterfall coming. It’s time to tell you what we’d do next.
Most of the time, risk management starts with the what not-to-dos:
- Don’t buy Gold, Silver, or Commodities (our asset allocation to those has been 0% for 6 months)
- Don’t buy US Treasuries, or Yield Chasing slow growth Equity ideas like Utilities or MLPs
- Don’t buy Emerging Markets (#EmergingOutlows is our Q213 Macro Theme)
Once you cross all that stuff off your list, you run out of places to put your money.
So, slowly, from here you can start to buy back:
- US Dollars
- US Financials levered to a steepening yield curve
- US Consumption Equities whose demand curves enjoy #StrongDollar tax cuts
Remember, it’s summer time – and the list of options is narrow – so take your time.
Since US Equities are really the only place we‘d like you to be (for now), here are the key levels to watch:
- US Dollar Index intermediate-term TREND support = $81.21
- SP500 intermediate-term TREND support = 1583
- US Financials (XLF) intermediate-term TREND support = $18.43
Rates rising at an accelerating rate is big risk, primarily because consensus was not positioned for it. Again, going back to our favorite thermodynamic metaphor (VOLUME + VELOCITY of water rising at an exponential rate as you approach the dam), what we have here this morning is a lot of unprepared white water tourists getting really wet.
If you’ve never tried this at home, don’t try Niagra first. Class VI Whitewater Rafting in West Virginia will get you all the hands on experience you’ll need. When you participate in markets, you have to respect that there are other people (who may not be able to swim) in your raft. And the risk associated with decisions they are forced to make happens fast.
If you have already hedged your Commodities and/or Fixed Income exposures this morning, you are on the shore. So take the time to think through the opportunity that you are staring at downstream:
- This point of max entropy (ripping yields) won’t happen every day – that risk is already over the Waterfall
- Rising bond yields is a pro-growth signal backed by accelerating 6 month consumption, employment, and housing growth
- Steepening curve (bond yields) = wider Yield Spread = bullish for Financials (XLF) that earn an accelerating return on that
I am sure Bernanke is a wonderful father and a nice man. But, folks, he has failed in being able to arrest gravity. He had no business promising people smoothing economic gravity was possible. That was his mistake. That’s his legacy. It’s also yesterday’s news now. The last of his soapy bubbles is finally popping. And there’s no price where he can buy “price stability” in bonds back.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1297-1379, $104.08-106.64, $81.21-82.18, 96.17-98.83, 2.21-2.46%, 14.76-18.98, and 1605-1656, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer