This note was originally published at 8am on February 04, 2014 for Hedgeye subscribers.
“In the real world, action and reward go together.”
Greg Berns is part of a stealth movement in America – he’s a neuroeconomist working in the Department of Psychiatry and Behavioral Sciences at Emory University in Atlanta, GA.
John Coates introduced me to Berns in a chapter called Thrill of The Search in The Hour Between Dog and Wolf. Coates went on to suggest that “when the Theory of Relativity dawned on Einstein, he must have had the mother of all dopamine rushes… dopamine, like noradrenaline, does a lot more than motivate the brain: it prepares the body for action” (pg 139).
Was your mind and body prepared for this selloff in US and Japanese equities? I can tell you one thing, my back is in spasm. But I think that has more to do with shoveling snow than being long Japan’s Mother’s Index (-18% in two days). Through action and reward, #History, #Math, and #Behavorial economics continue to be the three pillars of our learning process. Risk happens fast.
Back to the Global Macro Grind…
In addition to the crash in Japan’s widely held brokerage index, the Nikkei got crushed for another -4.2% lost last night, taking it to -14% for 2014 YTD. How many hedge funds were snowed into the short Yen, long Nikkei trade last year? Lots.
How many stayed long the Russell 2000 at the all-time high? That was only 9 trading days ago, don’t forget. And while I am certain that everyone on CNBC nailed it, for the rest of us a -7.4% nine day correction from an all-time peak provides a bit of a rush too!
The last time the US stock market had this sharp of a 9-day decline (Russell2000 = down -9.1% in 9 days in November of 2011), Ben Bernanke’s resolve was simple – print, print, print. So remind me why Janet Yellen won’t do the same?
If we get one more economic data point that crashes like yesterday’s New Orders component of the ISM did, remind me why the Mother of All Doves won’t:
A) Stop the tapering
B) Talk up more quantitative easing
Setting aside the eureka reality that commodity markets inflating and slowing real-consumption growth don’t give the Fed or the Bank of Japan what they are promising The People (sustainable growth), why won’t Yellen go back to the same old saw?
Maybe, just maybe, Mr. Macro Market is already front-running her on this. I know, while markets front-running our central planning overlords has been the only game in town now for the last half-decade, why would they be doing so again?
Humor Mr. Macro Market for another minute and play this probable (not to be confused with definite) scenario out:
- US #InflationAccelerating continues to slow real-inflation adjusted growth
- As US #GrowthSlowing freaks out the Fed, they whisper “no-more-taper” to Hilsenrath
- Whispers start to bury the Dollar again, Food and Gold prices continue higher yet again, and …
Growth slows even faster!
Oh, and by summer time they’ll be whining about “inequality” at Jackson Hole without accepting that Policies to Inflate only pay those who are long of coffee futures and mortgage-backed-securities, while they pulverize the poor.
Back to how bad that Institute for Supply Management’s (ISM) manufacturing report was yesterday:
- Headline ISM dropped -10% sequentially (month-over-month) to 51.3 JAN vs 57 DEC
- New Orders in the ISM crashed -20% month-over-month to 51.2 JAN vs 64.4 DEC
- Prices Paid in the ISM (inflation in costs) ripped +13% from 53.5 in DEC to 60.5 in JAN
Yes, since I’m so plugged in politically, I rigged the numbers to fit our Top Global Macro Theme of #InflationAccelerating like a glove. But don’t tell anyone I get this inside info or I’ll have to change the name of my firm.
Again, to review, this wasn’t all about the “weather”:
- Inflation (prices) rose, fast, month-over-month… and…
- Growth (orders) fell, even faster in kind
So enjoy the “green arrows” this morning. I am sure this market will bounce on no-volume again until we get the next US consumption #GrowthSlowing data point (tomorrow) in the ISM Services report for January.
With the CRB Commodities Index +1.4% vs. Consumer Discretionary (XLY) stocks -8.7% YTD, bulls can blame the weather. But that is the score. In the real world, if you don’t shovel your driveway and get to work, you probably won’t get paid that way either.
Our immediate-term Global Macro Risk Ranges are as follows:
Nat Gas 4.91-5.41
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer