This note was originally published at 8am on February 05, 2014 for Hedgeye subscribers.
“What we need is not the will to believe, but the wish to find out.”
I know. I’m going all #behavioral on you this year. When combined with #history and #math, it gives me an edge. And god knows, I’m not the smartest player in this league – so I need one!
The aforementioned quote comes from the introduction in the latest #behavioral book we’ve been discussing in the office, Counterclockwise, by Harvard Applied Psych professor, Ellen Langer.
Langer’s research is unique in that she was really one of the first women (1st woman to ever get tenure in Psychology @Harvard) to break the ice on a lot of topics that make us think about how we think. Her most popular book was Mindfulness in 1989. She wrote Counterclockwise in 2009 and it’s relevant to how you think about your risk management day.
Back to the Global Macro Grind…
Do you wish to find out why almost every major macro position that was working for you last year sucks for 2014 YTD? If I needed to believe that the Japanese-burning-currency thing was going to work, I could – but I’d be losing a lot of money on that.
Last night’s pathetic bounce in Japanese Equities (Nikkei +1.2% to -12.9% YTD) tells you all you need to know about Japanese consensus – all the locals (brokerage clients getting margin calls) were short Yen and long Mothers (as in the index Japanese dudes lever up on).
Most of Wall Street was in the same trade too. It was only 1 month ago today that the CFTC (futures and options) net short position in Japanese Yen hit all-time highs (-135,000 net short position in terms of contracts). This morning that net short position is -89,420 contracts.
Next to short Yen, what have been the other major consensus long/short positions in Global Macro options?
- LONG Oil – 3 month average = +363,977 net LONG contracts
- LONG SP500 (Index + E-mini) – 3 month average = +78,356 net LONG contracts
- SHORT US Treasuries – 3 month average = -115,078 net SHORT contracts
And how’s that going YTD?
- Brent Oil = DOWN -4.2% YTD (vs the CRB Commodities Index +2.5%)
- SP500 = DOWN -5.0% YTD
- 10YR US Treasuries = UP (with yields -13%, or 40 bps YTD)
Why? Do you want the answer that consensus needed to believe on December 31, 2013, or do you wish to believe what Mr. Macro Market is telling you about growth (hint: on the margin, with #InflationAccelerating, US growth is slowing)?
And it’s not just a USA thing. As you can see in our Chart of The Day (where we show “Hard Growth Comps” for countries versus “Easy Comps”), Japan and the United States were setting up to slow from their 2013 momentum peaks irrespective of this US weather.
Oh, and by the way, the weather on the Merritt in Connecticut this morning isn’t what the dude in Tokyo is dealing with via his margin calls. Japan actually just reported a 16 year low in wages. When his government has a Policy To Inflate the dude’s cost of living, that is not good!
How does the Burning Your Currency thing work again?
- Government prints lots and lots of moneys
- Currency goes down, and purchasing power of The People goes down
- Real (inflation adjusted) consumption growth slows
Then pop a “consumption tax” on your people (Japan’s is pending) and what people who need to believe about “Abenomics” (that it’s good because the stock market was going up) isn’t aligned with what politicians “wish to find out” about economic reality.
Back to the wage inflation (or deflation) thing, I’ll show you what’s going on in the USA on our US Economics Flash Call this morning at 11AM EST. After seeing big time pressure on wages throughout the 2008 crisis, aggregate private sector wages are actually tracking up +5% on a 2-yr comp basis. . If you need dial in details for the call, email firstname.lastname@example.org.
I know your run of the mill academic doesn’t model the US economy how we do (we model it on a 1, 2, and 3 yr comparative basis so that we don’t get run-over by changes on the margin in trends), but that’s cool. It seems to work.
What seems to be a developing bearish to bullish reversal in a @Hedgeye TREND may not turn out to be a long-term reality. But can you afford to miss 3, 6, and 12 month accelerations and decelerations in big macro stuff like growth and inflation?
We can’t. And that’s all I have to say about that.
Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TRENDs, bullish or bearish, in brackets):
SPX 1735-1782 (bearish)
Nikkei 14036-15004 (bearish)
VIX 15.49-21.63 (bullish)
USD 80.78-81.43 (neutral)
Gold 1239-1274 (bullish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer