Popping Bubbles

This note was originally published at 8am on October 30, 2013 for Hedgeye subscribers.

“It’s imperative that the Fed begins to taper.”

-Larry Fink

 

Not to be confused with what the CEO of Blackrock (and PIMCO) and anyone who was running levered long Bernanke’s Bond Bubble  was saying from June to August (when they weren’t positioned for bonds getting smoked), this is new.

 

We should have been tapering now for a few months so, on the margin this is progress, I guess. Don’t forget that guys like Fink and Bill Gross get paid to “advise” our un-elected Fed Chairman on timing. There’s no conflict of interest there vs The Rest of Us, of course.

 

Fink went on to say in Chicago yesterday that “we’ve see real bubble-like markets again. We’ve had a huge increase in the equity market. We’ve seen corporate-debt spreads narrow dramatically.” Ya think? Bubbles, bubbles, and more bubbles. Now our central planning overlords are going to time both how we inflate and pop them. #cool

 

Back to the Global Macro Grind

 

I’ll be seeing some of our top clients in NYC today, and it’s always interesting to see the whites of people’s eyes on USA central-market-planning days. When Bernanke shocked anyone who wasn’t on the inside of it all that he wasn’t going to taper on September 18th, I was seeing clients in Chicago. The look on people’s faces as they checked their iPhones and crackberries was flabbergasting.

 

I highly doubt Bernanke is going to signal a taper today. But I highly doubted he was going to cancel his entire “communication process” and not taper last time! So what do I know. I’m just a man in a room trying to let Mr. Market tell me who has inside information.

 

What I do know, and to a degree this is Fink’s blazingly obvious point, is that into both month-end (and Mutual Fund year-end) tomorrow we have a US stock market that is bubbling up to all-time highs.

 

Check this puppy out:

  1. Yield Chasing is Back! Slow-growth Consumer Staples stocks (XLP) = +7.9% for the month!
  2. SP500 at an all-time high (on no volume) = +5.4% for the month and +24.4% for the YTD
  3. Russell2000 at an all-time high = +32.0% YTD!

Now if you’ve been A) bullish on US stocks and B) bearish on Gold, Commodities, and Bonds for most of 2013 like we have, you’re pseudo cool with all of this. Commodities (CRB Index, 19 Commodities) are actually -5.1% YTD, so being completely out of some big asset classes has been as important as being long US growth when it was actually accelerating.

 

Now, not ironically, US #GrowthSlowing is what’s starting to marinate, sequentially (month-over-month) in SEP-OCT:

  1. US Pending Home Sales (SEP) reported earlier this week slowed -5.6%
  2. US Retail Sales #GrowthSlowing was reported yesterday at -0.1% vs +0.3% in AUG
  3. US Consumer Confidence for OCT dropped -11% month-over-month to 71.2 from 80.2 SEP

Isn’t this whole Bernanke Down Dollar, Rate Repression thing awesome?

 

To review our playbook, when they are happening at the same time:

  1. Down Dollar, Down Rates = #GrowthSlowing signal
  2. #StrongDollar, #RatesRising = #GrowthAccelerating signal

In other words, Fink finally has his policy lobby to Bernanke right. There is no US Growth Policy other than letting economic gravity occur. The only hope for 3-4% US growth (and a 4% 10yr Yield, $65 Oil, etc.) is via a consistent #StrongDollar Tapering Policy.

 

#StrongCurrency is cool guys. India is doing it. The British are doing it. So now all we need are all of our wonderfully and politically connected men and women of the United States of Centrally Planned America to do it.

 

Fink just did it. My boys tell me that back in the day he was a big Jimmy Carter Democrat. Today, he’s plugged into Obama’s ear too. So he can do this! Warren, you can do it too. Yes You Can!

 

If the US doesn’t do this, Europe will be the better place to allocate your capital in 2014. If the USA’s said free-market leadership signs off on Burning The Buck and Japanese Rate Repression, the Euro, Pound, and Swiss Franc are going up. If that continues to happen, you’ll basically have the exact same call we made on US growth almost a year ago occur in Europe:

  1. #StrongEuro, #StrongPound, etc. = deflates European inflation
  2. Inflation slowing = real/inflation-adjusted economic growth stabilizing, then accelerating

At the beginning of Q413 we called this Top Global Macro Theme #EuroBulls. And with Spanish consumer prices (CPI) dropping to NEGATIVE year-over-year in the most recent month (-0.1% y/y OCT vs +0.9% in SEP), we’ll reiterate that call again this morning.

 

As for the popping of the bubbles, to paraphrase my pal Hemingway, at first it happens slowly (#GrowthSlowing), then like in November of 2007, it happens all at once. After locking in its YTD low on September 2nd (when we were long growth), our Bull/Bear Sentiment Spread just ripped to a fresh YTD high this morning – that’s a +60% move to the bullish side in 2 months. #bubbly

 

Our immediate-term Risk Ranges are now:

 

UST 10yr Yield 2.40-2.60%

SPX 1752-1774

DAX 8920-9063

Spain’s IBEX 9588-10,097

Euro 1.36-1.39

Pound 1.60-1.62

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Popping Bubbles - Chart of the Day

 

Popping Bubbles - Virtual Portfolio


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