“Self trust is the first secret of success.”
-Ralph Waldo Emerson
With a little more downtime than usual this past week I had the opportunity to crack open a few new books. One of them is a leadership book that’s been in my pile for almost a year now titled Unusually Excellent, by golf pro John Hamm.
The aforementioned quote is the opening line from Chapter One – Being Authentic, The Courage to Be Yourself. And it’s followed up by another insightful thought by Lao Tzu: “He who knows others is wise. He who knows himself is enlightened.”
Hamm’s core leadership framework has three parts: Credibility, Competence, and Consequence. In other words, be who you are, do what you do, and be accountable for the decisions you make. Trust your process in 2014 and people will probably trust you.
Back to the Global Macro Grind…
When people ask me why I seem so confident in my process, it’s relatively easy to explain. My process embraces change and uncertainty. One of the simplest truths that I trust about this game is that my process will change as my business, markets, and economies do. It’s a lot easier being confident in that than a predetermined dogma, conclusion, or ideology.
Lots of people in the media have asked me what my “highest conviction calls are for 2014?” Instead of being put in a box, I just say that I’m very confident that I have no idea what will happen across a trivial twelve month period. Then the other side of the conversation gets quiet. And I assure them that its really ok. “I don’t know” is often the answer.
What I do know is that I’ll be up and at it, grinding away alongside my teammates, at the top of every risk management morning in 2014. Every day starts with information surprise – new economic data, market risks, price moves, etc. – it’s kind of like Christmas, but every morning, for Canadian-American macro market geeks.
On that score, last week was as interesting as any other week in 2013:
- US interest rates ripped back up to their YTD highs
- US stocks ripped back to their all-time highs
Even though this wasn’t the way consensus expectations drew it up with its “2013 predictions” at this time last year, all-time, as we like to say here @Hedgeye, is a long time.
With the Fed reacting (on a 3-month lag) to what markets have been pricing in all year (US GDP #GrowthAccelerating from 0.14% Q412 to 4.12% Q313), all we have witnessed here is a run-of-the-mill rotation out of fear (slow-growth yield chasing) and into growth itself:
- SP500 and Russell 2000 = +1.3% each last week to +29.1% and +36.7% YTD, respectively
- 10-year US Treasury Yield = +11 basis points to 3.00% (+124 basis points, or +70% YTD = #RatesRising)
- US Equity Fear (Volatility) = VIX down another -9.6% last wk to -30.9% YTD #crashing
All the while, underneath the hood, the month-to-date performance across asset classes and investment Style Factors continues to do what it constantly does – change:
- SP500 = +1.97% for DEC to-date
- Basic Materials (XLB) = +3.81% and Utilities (XLU) = -0.58% DEC to-date, respectively
- CRB Commodities Index (19 commodities) = +3.4 and Copper = +5.6% DEC to-date, respectively
In other words, as US #GrowthAccelerating hits its crescendo (rate of change on a 9-12 month basis), market expectations for INFLATION are finally starting to rise again. That’s new.
And yes, inflation expectations rising will eventually slow real (inflation adjusted) economic growth. But since the entire edifice of Certainty Forecasting that is Old Wall Street and Washington DC “economics” centrally plan and predict on a lag, threading the needle on when #GrowthSlowing might matter to market expectations is going to be one of the more important things I do.
Notwithstanding it’s 1-wk up move on the taper news, it’s important to acknowledge the real-time #GrowthSlowing factor that is the USD falling for 6 of the last 7 weeks. That, in our model, is what is perpetuating the resurgence of inflation expectations. While we were bearish on Commodities for over a year, Mr. Macro Market is telling us to go neutral on that, for now.
Got respect for Mr. Macro Market? My process does. This is a short-term market reality, but looking at the 15-day inverse correlation between the CRB Commodities Index and the USD right now, it’s jumping off my screen at -0.94. And with the Euro breaking out versus USD (see our Q413 #EuroBulls Macro Theme), Down Dollar (with taper!) is to be respected by our process as well.
Our immediate-term Global Macro Risk Ranges are now (Top 12 ranges are in our Daily Trading Range product):
UST 10yr Yield 2.93-3.05%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
THE MACAU METRO MONITOR, DECEMBER 30, 2013
GREEK MYTHOLOGY CASINO UNAFFECTED BY HOTEL SEIZURE Macau Business
The seizure of the New Century Hotel and Casino has not affected the Greek Mythology Casino, according to one of the casino’s shareholders. Junket investor Amax International Holdings Ltd told the Hong Kong Stock Exchange that the hotel and the casino were separate. Amax says the casino is a tenant of the hotel. It has an equity interest in the casino’s operations.
EMPLOYMENT SURVEY FOR SEPTEMBER-NOVEMBER 2013 DSEC
Unemployment rate (1.9%) for September-November 2013 held stable from August-October. Employment in the Gaming sector increased by 2.9% to 85,000.
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TODAY’S S&P 500 SET-UP – December 30, 2013
As we look at today's setup for the S&P 500, the range is 42 points or 1.33% downside to 1817 and 0.96% upside to 1859.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.62 from 2.61
- VIX closed at 12.46 1 day percent change of 1.05%
MACRO DATA POINTS (Bloomberg Estimates):
- 10am: U.S. Pending Home Sales M/m, Nov., est. 1% (pr -0.6%)
- 10:30am: Dallas Fed Manufacturing Dec. (prior 1.9)
- 3pm: New York Fed releases Jan. Treasury purchase schedule
- U.S. Rates Weekly Agenda
- FX Weekly agenda
- House, Senate not in session
- Kerry sets plans to travel to Mideast on New Year’s Day
- Extended jobless benefits ran out Dec. 28 for 1.3m people
- China’s cash-for-votes scandal highlights graft challenge
WHAT TO WATCH:
- Crocs CEO to retire as Blackstone takes $200m Stake
- Obamacare enrollments reach 1.1m with surge in Dec.
- Ford brand widens U.S. sales lead over Toyota
- Sanofi multiple sclerosis drug fails to win FDA approval
- Australia iron-ore exports curbed; ports close before storm
- Mondelez to sell Snackwell’s stake to private-equity firm: WSJ
- CFTC’s Gensler says regulators reached “right balance” on rules
- Hyundai Motor replaces U.S. chief to revitalize 2014 sales
- UBS unit among China brokers facing penalties for Dec. 20 trades
- China local debt rises to $2.95 trillion amid economic risks
- Chesapeake Energy paying to move gas it doesn’t have: WSJ
- Merck working on plans to reshape R&D, WSJ reports
- Cal-Maine Foods (CALM) 6:30am, $1.30
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Trades Above $100 for Second Day as Oil Stockpiles Decline
- Gold Declines on Way to Worst Year Since 1981 as Silver Drops
- Copper Traders Bullish as Hedge Funds Bet on Gains: Commodities
- World’s Biggest Iron-Ore Port Is Shut as Cyclone Nears Australia
- Coffee Climbs in New York on Index Reweighting; Cotton Advances
- Aluminum Reaches Eight-Week High as U.S. Rebound Spurs Buying
- Corn Drops to One-Week Low as Rain Eases Argentine Crop Stress
- Rubber Falls to Post Annual Decline as China Inventory Climbs
- Rebar in Shanghai Drops to Two-Month Low as Inventory Climbs
- Most-Accurate Oil Forecasters See Second Year of Losses: Energy
- Natural Gas Gains on Forecast for Cold Start to New Year in U.S.
- Sesa Sterlite Restarts Iron-Ore Mines, Easing Supplies in India
- Natural Gas Consumption Likely Sluggish Into 2014: Bear Case
- Cotton Prices Seen Declining as China Poised to End Stockpiling
The Hedgeye Macro Team
This note was originally published at 8am on December 16, 2013 for Hedgeye subscribers.
“I look forward with the greatest pleasure to the use of my books at night at home.”
That’s a quote from Doris Kearns Goodwin’s The Bully Pulpit (pg 108) where she establishes one of the similarities that Presidents Teddy Roosevelt and William Taft shared from the very beginning. They both loved to read.
On the idea of Professional Reading as a leadership and risk management tool, one of my good friends, Rory Green, sent me a note this weekend highlighting the thoughts of retired US Marine Corps General, James Mattis.
“The problem with being too busy to read is that you learn by experience, i.e. the hard way. By reading, you learn through others’ experiences, generally a better way to do business; especially in our line of work where the consequences of incompetence are so final for young men.” #Truth
Back to the Global Macro Grind…
A small but critical portion of my Professional Reading includes staying on top of consensus. Two of the most important sources of #OldWall Street and #KeynesianEconomics consensus are:
- The Economist
That’s not to say that every once in a while these publications don’t crush it with a forward looking idea (like Barron’s highlighting our bearish work on McDonald’s (MCD) or MLPs Linn Energy and Kinder Morgan!). It’s just to say these are places where you’ll find consensus.
So what is consensus right now on the two most important drivers of our Global Macro Model – Growth and Inflation?
- US GROWTH: cover of Barron’s “Outlook 2014” this weekend = “Bullish On 2014”
- INFLATION: mid-November cover of The Economist = “The Perils of Falling Inflation”
And while we’ve been the US growth bulls (and inflation bears) for the last year, our model rolls into 2014 with the following views:
- US #GrowthSlowing from its Q313 highs (GDP to be reported on Friday around +3.6%)
- #InflationAccelerating from its Q413 lows (bottoming in OCTOBER at 1.0% y/y CPI)
On US growth, Darius Dale published a full research note to our Institutional subscribers on Thursday titled “#GrowthSlowing, Lots of Charts.” If you’d like a copy of that note and what’s embedded in our model’s expectations just ping Sales@Hedgeye.com. One of the baseline assumptions in our model is that inflation slows real (inflation adjusted) growth.
Q: What’s the leading indicator for inflation?
A: Central planners devaluing the purchasing power of The People via its currency
And, not to be confused with US #GrowthAccelerating (like it is in Germany this morning with a PMI of 54.2 for DEC vs 52.7 NOV = #StrongEuro), what’s been happening in the USA for DEC to-date is #InflationAccelerating:
- US Dollar = DOWN (for 5 weeks in a row ahead of the Fed not tapering as it should have)
- Commodities = UP (CRB Commodities Index = +0.4% last wk and +1.7% for DEC to-date)
- US Stocks = DOWN (SP500 = -1.6% last wk and -1.7% for DEC to-date)
I know, I know. What’s jamming the American people with a little food (coffee prices +8% last week) and gas (natural gas +6% last week) inflation ahead of the holidays if everyone @FederalReserve is taking car service to work and living large at holiday cocktailers?
Well, in our model it matters. It especially matters on the margin when:
- GROWTH’s slope is topping and
- INFLATION’s slope is bottoming
Perversely, a Fed no-taper for DEC will only perpetuate this. The US Dollar is down another -0.25% this morning as it tries to front-run the Fed’s conflicted and compromised political decision to not taper when it should have been tapering since September.
But, for now, asset inflation (especially commodities) loves that. So don’t worry about inflation slowing growth in 2014, because no one in the Barron’s survey other than Jeff Knight (buy-sider from Columbia Management) thinks it will either.
According to Barron’s, “Wall Street’s top strategists” (which include Morgan Stanley’s Adam Parker who had a 1434 SP500 “target” for 2013 at this time last year; the mean “target” was 1531)… “see a sense of normalcy returning to the financial markets next year.”
So we’ll roll with a call for accelerating volatility in the New Year too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr yield 2.78-2.92%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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