This note was originally published at 8am on August 08, 2013 for Hedgeye subscribers.
“So I hope you can accept nature as She is – absurd.”
That’s what one of America’s great physicists, Richard Feynman, had to say about how quantum mechanics explains life. I think it describes markets well too. It “describes nature as absurd from the point of view of common sense. “ (American Prometheus, pg 79)
“What Do You Care What Other People Think?” Good question. That was also the title of the book Feynman published in the year of his death (1988). It’s a question that I’d love to hear almost everyone in this profession answer out loud.
Yesterday, I asked you if the latest bear market correction was going to be 1%, 2%, or 5%. In case you care what consensus thinks, not one of you answered 1% (which means it’ll probably be 1%). Yesterday’s -0.4% drop in the SP500, put the 2-day correction from her all-time high at -1.1%. #Absurd
Back to the Global Macro Grind…
I know, the absurdity of challenging perceived wisdoms in one of the last professions that has been forced to face the fiddle of accountability. If you don’t want to see any of it, turn Twitter off and watch the channel the rest of us have on mute.
To review reality (2013 YTD):
- Consensus came into 2013 long slow growth, Gold, and Bonds
- Consensus is now selling slow growth, Gold, and Bonds, but too scared to buy growth
But not just any kind of growth – our nature is to not buy “expensive” looking growth. Absurdly, in a growth investor’s market, expensive gets more expensive (Tesla, TSLA +18% pre-market).
“Oh, so you’re telling me growth is back Mucker? Ok, then I’m going to go buy an Emerging Market”
As you can see in Darius Dale’s Chart of The Day, Emerging Market Growth is SLOWING as the slope of US and Japanese Growth is ACCELERATING (and large components of European growth is STABILIZING).
Just model the slopes of lines. Simple is as simpleton does from Thunder Bay, Ontario. In our GIP (Growth, Inflation, Policy) model here @Hedgeye, the G and I (Growth and Inflation) are doing 1 of 3 things from a slope perspective:
And that’s just about it.
Markets pay a higher multiple for companies showing what?
- Revenue Growth Accelerating
- Margins Expanding
So why is my macro model considered so absurd? It’s the same thought, but for countries:
- GDP growth going from slowing to stabilizing to accelerating = LONG
- GDP growth going from accelerating to slowing (on the margin) = SHORT
- Inflation slowing (via strong currency) + GDP Growth accelerating = REALLY LONG
- US employment, housing, and consumption growth went from slowing (Q412) to stabilizing, to accelerating
- Emerging Market growth (China, Brazil, etc) went from slowing to slowing at an accelerating pace
All the while, July’s YTD high in #StrongDollar gave local inflation to “emerging markets” like India as the Rupee started to crash. Show me GDP Growth Slowing + Inflation Accelerating (India) and I’ll show you a stock market that is down YTD.
I’m not sure why I went off on all of this today. Probably just a function of the absurdity of me having to come up with something in 45 minutes or so at the top of the risk management morning. Thanks for reading my rant.
Our immediate-term Risk Ranges are now as follows:
UST 10yr Yield 2.57-2.73%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer