Innovation's Hand

This note was originally published at 8am on September 03, 2013 for Hedgeye subscribers.

Economists everywhere have counseled governments to attend to everything except what matters most: innovation.”

-George Gilder

 

When Adam Smith published Wealth of Nations (1776), he wasn’t thinking about the American Revolution or Twitter – neither was he considering real-time streaming information in the palm of your hand as a birth child of Silicon Valley-style free market capitalism.

 

“The Wealth of Nations depicts macroeconomics as a “Great Machine” in which every cog of every gear, governed by an “invisible hand,” functions perfectly in its time and place, as smoothly and reliably as Newton’s gravity.” (Knowledge & Power, pg 28)

 

While that might make for an tidy intro to an economics textbook at Yale, it doesn’t reflect the new reality of what we’ve learned about economies and markets. They are non-linear. And they observe large doses of surprise (entropy), whose “opposites are predictability, order, equilibrium, and tyranny” (pg 34 - Gilder absolutely nails our framework in chapter 4, “Entropy Economics”).

 

Back to the Global Macro Grind

 

After the lowest volume week of 2013, the SP500 holds @Hedgeye TREND support of 1631 and #RatesRising looks just about right again this morning. We like growth stocks. We don’t like Gold or Bonds. Welcome to September.

 

“The most important feature of an information economy, in which information is defined as surprise, is the overthrow, not the attainment of equilibrium.” (Knowledge & Power, pg 30)

 

I make lots of little mistakes, but the baseline process behind not making the really big macro mistakes adheres to the 2nd law of thermodynamics (entropy). Assuming Bernanke’s Fed (and the entire bond market) wouldn’t be surprised by bullish economic surprises has rendered itself the biggest macro mistake you could have made in 2013.

 

Why did the SP500 hold TREND support last week?

  1. JOBS: US weekly jobless claims hit another fresh YTD low last week (NSA rolling avg = -10.6% y/y, YTD lows)
  2. GROWTH: New Orders component of the August PMI accelerated to 57.2 versus 53.9 in July (fresh YTD highs)
  3. CONFIDENCE: US Consumer Confidence (U of Michigan Survey) bumped back up to 82.1 AUG vs 80.0 last

Well, maybe that’s not why the US stocks held support – maybe it’s just coincidence. But in our model all economic surprises matter to the extent that the market says they do. Against the heavy-hands of your big government gods, US interest #RatesRising  (see 10yr US Treasury Yield in our Chart of The Day) has fit US #GrowthAccelerating data since last November like a glove.

 

And, sorry Krugman fans – this simple real-time market model fits almost perfectly in the birthing zones of John Maynard Keynes and Adam Smith themselves. Check out the direness of it all, born out of UK style austerity:

  1. United Kingdom Producer Manufacturing Index (PMI) for AUG = 57.2 versus 54.6 in JUL = new highs
  2. United Kingdom Construction PMI for AUG = 59.1! (versus 57 in JUL) = new highs
  3. UK 10yr Gilts (Bonds) up to 2.84% this morning = +44bps (+18%) month-over-month (+121bps y/y)

Maybe that’s why the UK stock market (FTSE) held its intermediate-term TREND support line of 6378 too. Maybe not – maybe it’s just coincidence. Regardless, if the world is really ending, I don’t mind living in it while it lasts.

 

I know it’s crazy, but I have to say I’m loving life and Innovation’s Hand altogether this morning. Information empowers the average person like me to take on the tyranny of perceived wisdoms. Summer time is over, and it’s time to create!

 

Are you crazy? I can be; especially when I get bullish. June got me more bullish on buying growth (and shorting slow-growth assets like Bonds, MLPs, etc.). So did August. This time I could be dead wrong. But if I’m wrong that will mean consensus finally has it right.

 

Here’s my real-time sanity (consensus sentiment) check:

  1. Front-month fear (US Equity VIX) just ripped a +23% w/w move to another lower-high (TREND = 18.98 resistance)
  2. II Bull/Bear Survey just registered the least amount of Bulls in 2013 at 38.1%
  3. II Bull/Bear Spread (Bulls minus Bears) just dropped from +3310 in the 1st wk of AUG to +1460

In other words, since the US stock market registered all-time highs (1st week of August 2013):

  1. VIX = +44%
  2. II Bull/Bear Spread = -56%

And that’s ahead of the seasonal headwind in the most important leading indicator for US employment #GrowthAccelerating (NSA rolling Jobless Claims) turning into a tailwind (until February 2014) in September.

 

#cool

 

And so are the entrepreneurs and innovators who have been getting it done while a bunch of politically-partisan and compensation-conflicted folks in this country have spent the last 9 months whining.

 

We’ve always been the backbone of American Free-Market Capitalism, and unless you let some government dude take that liberty away from us, we’ll be cranking out the change you all want to see in this country while Krugman is sleeping.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield = 2.71-2.93%

SPX 1631-1661

DAX 8180-8292

Nikkei 13,362-13,998

VIX 15.74-17.81

USD 81.83-82.29

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Innovation's Hand - Claims vs 10Y 082913

 

Innovation's Hand - Virtual Portfolio


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