Lest Occasion Be Given

This note was originally published at 8am on July 08, 2013 for Hedgeye subscribers.

“Idleness is the enemy of the soul.”

-Saint Benedict

 

There were some major contradictions in Benedict of Nursia’s “rules.” Monks not being able to openly debate what they were being told to read was one of them. I started reading Stephen Greenblatt’s Pulitzer Prize Winner, The Swerve – How The World Became Modern, this weekend. That’s what has me thinking about that.

 

Benedictine Rule provided the foundations for western monasticism. “Let there be complete silence. No whispering, no speaking – only the reader’s voice should be heard there… no one should presume to ask a question about the reading or about anything else, lest occasion be given.” (The Swerve, pg 27)

 

Reading and writing makes me think. Thinking requires what Einstein called for – constant questioning of premise. Some people don’t question either Keynesian Economics or the US Federal Reserve’s policies whatsoever. Markets, on the other hand, take occasion to debate policy makers all of the time. They front-run the next decision that will be imposed on us from upon high.

 

Back to the Global Macro Grind

 

From the holy heights of Chaos Theory the globally interconnected ecosystem gives us this thing called economic gravity. As US employment #GrowthAccelerating continues to surprise on the upside, expectations for Fed tapering get pulled forward.

 

Last week’s market pricing of gravitational-risk was as closely aligned with what has been happening for 6 months as any week in 2013. Here were the big week-over-week moves, bundled within our core Hedgeye Global Macro Themes:

  1. #StrongDollar – US Dollar Index +1.6% on the week; up for 3 weeks in a row, and +5.9% for 2013 YTD
  2. #RatesRising – UST 10yr Yield +25 basis points on the week to a fresh weekly closing YTD high of 2.74%
  3. #EmergingOutflows – MSCI Emerging Markets and Latam Equity indexes -2.4% and -4.3% on the week, respectively

Yes, our Macro call for the last 6 months still has some serious flow to it:

  1. Dollar Up = Commodities Down
  2. Commodities Down = Commodity Linked Emerging Markets Down
  3. Emerging Markets Down = Emerging Outflows Up

Follow the flow. All that moulah has to, eventually, flow somewhere; especially as money’s prior flows start going the other way (at an accelerating rate).

 

So, you can either be long US Dollars and US Consumption Equities on the following fundamentals:

  1. Employment #GrowthAccelerating
  2. #HousingsHammer ripping a +12.2% y/y gain in US Home Prices (wealth effect)
  3. Consumption #GrowthAccelerating from 1.0-1.2% to 2.0-2.4% in the last 6 months

And/or, you can being long US Dollars and US Consumption Equities because you can’t be long anything else!

 

Lots of clients are asking us what we’re going to do with Gold, Treasuries, and Emerging Markets from here. And our answer is more of the same. We update our dynamic asset allocation model daily. Here’s the latest on that:

  1. Commodities = 0%
  2. Fixed Income = 0%
  3. Int’l Equities = 0%

Zero percent is about as clear a statement as we can make. And while we’ve had 0% in Commodities and Fixed Income for some time now, I don’t think last week’s combination of #StrongDollar + #RatesRising gets us less confident in that positioning.

 

Why would it? In macro there is this thing called momentum that trumps valuation. When negative PRICE MOMENTUM meets VOLATILITY and OUTFLOWS  (all at once), that’s uber bearish.

 

Having 0% asset allocation to International Equities is probably the position we’ll hold for the least amount of time. But, with Emerging Markets (MSCI EM) -13% and Latin American Equities (MSCI Index) -19.7% YTD, respectively, we’re in no rush.

 

For now, with both the Russell 2000 (IWM) and US Consumer Discretionary (XLY) US Equity market indexes hitting fresh all-time highs at +18.4% and +21.8%, respectively, occasion has been granted by the gods of our meritocracy to keep questioning consensus and reading more books.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr 2.55-2.74%

SPX 1617-1639

VIX 14.14-16.49

USD 83.39-84.59

Yen 99.13-101.71

Gold 1179-1242

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Lest Occasion Be Given - Chart of the Day

 

Lest Occasion Be Given - Virtual Portfolio


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