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

“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:

  1. US interest rates ripped back up to their YTD highs
  2. 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:

  1. SP500 and Russell 2000 = +1.3% each last week to +29.1% and +36.7% YTD, respectively
  2. 10-year US Treasury Yield = +11 basis points to 3.00% (+124 basis points, or +70% YTD = #RatesRising)
  3. 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:

  1. SP500 = +1.97% for DEC to-date
  2. Basic Materials (XLB) = +3.81% and Utilities (XLU) = -0.58% DEC to-date, respectively
  3. 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%

SPX 1817-1859

VIX 11.06-13.83

USD 80.09-80.72

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Trust Your Process - 5Y Breakeven

Trust Your Process - 55