This note was originally published at 8am on November 11, 2013 for Hedgeye subscribers.
“They had no heads. The frenzy was all they had… the urge, and the urge was all they felt.”
-Tom Wolfe (Back To Blood)
In between my son Jack’s hockey practice and his 6th birthday bender, I’d like to say that it surprised me this weekend when I glanced at the cover of The Economist’s headline: “The Perils of Falling Inflation.” But, sadly, it did not. PhD Keynesian Economists are officially the world economy’s greatest threat.
The urge for policy makers to do something has reached a tipping point. Un-elected and un-checked, Janet Yellen’s Federal Reserve is likely to embrace this unprecedented Policy To Inflate that the Europeans (ex-UK) have just reiterated via an ECB rate cut. Incrementally easing monetary policy into an economic acceleration of +2.84% US GDP, that is.
The Economist’s sub-title makes the media as complicit as Nero (The Emperor “who fiddled while Rome Burned” -Wikipedia): “In both America and Europe central bankers should be pushing prices upwards.” I couldn’t make this up if I tried. After Deflating The Inflation (from the 2011-2012 all-time global inflation highs), these people want the all-time highs in food and Oil prices again!
Back to the Global Macro Grind…
Deflating The Inflation is not DEFLATION. That’s one of the many buzz words regressive economists use to fear-monger you into believing you should allow them to A) devalue your hard earned currency and B) earn 0% on your savings, forever.
In the 1980s/1990s, we had < $20 Oil. I might call that “deflation”, but Brent Oil at $105? And if the 2 best post WWII US Growth periods (1983-89 and 1993-1999) were reflexive #StrongDollar “deflation” periods, what’s the problem with deflation again?
A study we highlighted in our Q313 Macro Themes deck by Atkeson and Kehoe spanning a period of 180 years (17 countries) found 0% relationship between deflation and depressions. There were actually more depressions during periods of inflation than deflation. That won’t shock anyone who lives in the real world.
In other news, look at what happened in macro markets last week:
- Dollar Up (+0.6% US Dollar Index)
- Rates Up (+13bps to 2.75% on the UST 10yr)
That’s what I want. That’s not what my Federal Reserve loving Keynesian types (Zervos and Hatzius) want. Neither do guys and gals who are in the business of being levered long Gold, Bonds, or anything Equities that looks like a bond.
Again, with a stronger Dollar + #RatesRising, look at what else you got last week:
- Gold down another -1.9% to -23.6% YTD #crashing
- REITs and MLPs -4.1% and -1.9, respectively, lagging the Financials (XLF) +1.2%, big time
- Emerging Markets (MSCI EM) -1.7% and MSCI LATAM Index -2.8% (to -12.9% YTD)
No, this is not what all of #YieldChasing investor styles want. They want what Bernanke and Yellen taught the Japanese and Europeans to want – a “risk-free” rate of 0% that punishes savers and forces Mom & Pop to buy into the slow-growth Gold Bond Bubble thing under the cowardly veil of a “deflation” threat.
In markets, eventually tends to happen quickly. Eventually, the mother of all “deflations” will be in the price of overvalued, over-stimulated, and over-owned debt that policy makers are urging investors to buy into. To a large extent, that’s been our call for the better part of 2013 – that a stronger US Dollar + #RatesRising would prick the Bernanke Gold Bond Bubbles.
So how is Janet Yellen going to reflate Gold, Bonds, MBS, REITS, etc. if:
A) Economic gravity doesn’t cooperate with her (more GDP of 2.84% and US monthly employment report beats?)
B) Fund Flows continue to front-run her?
Solving for A) is already in motion. She’ll do what every central planners going back to Nero did and change the rules. She’ll make up a new unemployment target of 5.5-6% and she’ll cry wolf about “deflation” when it’s Deflating The Inflation that gave the USA growth surprises on the upside to begin with!
As for B), Bernanke and Yellen have been highly ineffective in convincing the buy-side that this ends well. Looking at last week’s ICI Fund Flow data, the flows continue out of Fixed Income and into Equities:
- Equities: after a record weekly inflow in the wk prior, US equity fund flows were up another +$7.9B w/w
- Fixed Income: another -$4.1B in outflow last wk following -$2.3B in the wk prior
All the while, the US IPO market is partying like 1999 with 192 IPOs ($51.8B) for 2013 YTD!
The urge to surge! It’s all about the urge to inflate asset prices, baby! These people have no heads. This is a bubble frenzy. To bubble up, or not bubble up (every prior asset bubble the Fed has perpetuated), remains Mr. Market’s question.
Our immediate-term Risk Ranges are now:
UST 10yr Yield 2.64-2.77%
My heartfelt thank you goes out to all the service men, women, and veterans around the world who have watched over us while we sleep,
Keith R. McCullough
Chief Executive Officer