This note was originally published
at 8am on July 15, 2013 for Hedgeye subscribers.
“Wisdom is not wisdom when it is derived from books alone.”
Horace was the prominent Roman poet during Augustus’ reign. He died at the age of 56, in 8 BC. Despite his fear that his “books would eventually become food for vandal moths” (The Swerve, page 84), his wisdoms didn’t die alongside him.
History teaches those of us who care to study it more than we’ll ever be able to know. The more I read, the more I realize that I know very little. History also gives me a tremendous appreciation for both empathy and context.
If you can’t empathize with another person’s perspective, how can you criticize it? If you can’t contextualize today within yesterday, how can you handicap where we may be going next?
Back to the Global Macro Grind…
Given that I have a degree in Keynesian economics, I feel relatively comfortable disagreeing with many of its assumptions. Admittedly, doing it with my own money instead of theorizing from a textbook helped expedite my learning process.
“Don’t think, just do” is something else that Horace wrote. But just doing isn’t enough. You have to be held accountable to what you are doing. Learning from your mistakes is an invaluable lesson. Doing it with other people’s money is called responsibility.
I suggest both the Fed and the President of the Unites States consider that when affecting either the value of our currency and/or the risk-free rate of return on our hard earned savings. On both major factors, there is responsibility in their policy recommendation.
How does this tie back to the US economy?
- Monetary and Fiscal Policy is causal to A) the value of a currency and B) the risk-free rate of return on that money
- Since WWII, there has never been a sustained US economic growth period without #StrongDollar and #Rising Rates
So why fight history? That’s what Bernanke is currently trying to do. If you are a Bernanke fan, at a bare minimum, you have to acknowledge that he is trying to “smooth” the pace of US Dollar gains and #RatesRising at this point. Why should we let him?
In the very immediate-term, we know what an acceleration in #StrongDollar and #RisingRates does:
- It smokes Gold and related #CommodityBubbles
- It beats down on Treasuries and related Bonds
- It eats into slow growth #YieldChasing investments (MLPs, Utilities, Junk Bonds, etc.)
And that’s all bad for who? Bingo – those who are long 1, 2, and 3. Meanwhile, who gets paid?
- Consumers - #CommodityDeflation = Tax Cut
- Savers – risk free rates of return on Savings accounts go up, finally
- Growth Investors – oh yes folks, this one is stealth
The first two compensation pools of people are obvious. Those populations, by the way, are much larger than the partnership group at PIMCO that gets paid in size if Bonds outperform growth stocks in perpetuity.
The third constituency is for crazy people like me. You know, people who don’t wake up every morning trying to scare the hell out of you, burn your currency, and hand your tax-dollars over to bankers who pay themselves. We are Growth Investors.
Whether I’m investing in a low-dividend yielding big cap growth stock like Starbucks (SBUX) or private growth company like Hedgeye, it’s all the same bet. We aren’t betting on the end of the world. We are betting on brands and people. We are betting they grow.
Put another way, here’s how the market has been scoring this for the last month:
- Consumer Discretionary (XLY) stocks +5.1% versus Basic Materials (XLB) stocks -0.8%
- Low Yield stocks (i.e. growth stocks) are +5.1% in the last month and +26.3% YTD
- Top 25% EPS growth stocks (SP500) are +4.9% in the last month and +23.7% YTD
Bernanke, you got a problem with that?
I didn’t read this in your Keynesian Econ 101 book, bro. It’s on the tape. This is not only consistent with the 1983-1989 (Reagan) and 1993-1999 (Clinton) bi-partisan periods of US growth investing (where US GDP averaged over +4% during each period), it’s been a consistent market message for the last 180 days. Read and respect its message.
For the last 6 months, here are the #StrongDollar correlations to major market moves:
- SP500 = +0.75
- Commodities (CRB Index) = -0.78
- Gold = -0.74
No, no, no. The Mucker is not considered a wise man in Washington. Nor does he want to be. But please, my friends, please - don’t let an un-elected body of perceived wisdom at the US Federal Reserve mess this one up again. The gravity of Mr. Market’s wisdoms have spoken. They are the most pro-growth signals we have seen in years. Only your government can mess this one up this time.
I’ll be hosting our Q312 Global Macro Themes call at 11AM EST this morning. Ping Sales@Hedgeye.com if you’d like access.
Our immediate-term Risk Ranges are now:
UST 10yr 2.44-2.77%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer