This note was originally published at 8am on February 10, 2014 for Hedgeye subscribers.
“Everything is the same, until it is not.”
-Dr. Ellen Langer
Love that quote in chapter 3, “Variability”, in Langer’s #behavioral beauty, Counterclockwise. “People aren’t all that observant, although we think we are. We see what we expect to see, even to the point that we don’t notice things that others clearly do” (pg 33).
Growth investors want to see growth, Gold Bond investors want to see slow-growth, and I want to see Canada win medals at the Olympics. It is what it is – it’s called confirmation bias. And, on some level, most of us have it in us.
(Can you see both women in the picture below?)
So how do we become more objectively observant? How do we force ourselves to see what we don’t want to see? Since I’m talking about markets, I think you know where I wash out on this. Mr. Macro Market usually shows us the way.
Back to the Global Macro Grind…
If you were looking to rekindle 2013’s bull market in US stocks, all you’d have to have done is look at the Dow on Friday. It was +165 points (+1.1%) on the second straight jobs report miss. Everything is the same as last year, right?
Nope. Including Friday’s low-volume rally (the Top 5 Volume days of 2014 have been down days), the Dow and SP500 are down -4.7% and -2.8%, respectively. And they’ll probably be down again today.
This is not 2013 (when inflation was falling and US consumption and employment growth were accelerating). This is 2014 and with #InflationAccelerating again last week, US consumption growth is slowing, faster.
Got Hedgeye Macro Theme #1 for Q114?
- US Dollar down -0.8% last week and back below @Hedgeye TREND support of $81.12
- CRB Commodities Index (19 commodities) +2.3% last wk to +3.4% YTD
- CRB Foodstuffs Index up another +1.1% last wk to +4.5% YTD
In other words, as the US economic data slows, Mr. Macro Market is starting to front-run proactively predictable behavior that Janet Yellen will back off on the tapering and/or change the goal posts again on the Fed’s dual mandate.
Everything that matters in macro happens on the margin, so don’t forget that last year the Fed got incrementally tighter – anything less would be dovish on the margin, including Yellen moving toward what print-money-forever PhDs call “forward rate guidance.”
Not to be confused with something that will work in getting early 2011-style #InflationAccelerating off the US consumer’s back, “forward rate guidance” is basically what Japan did decades ago in telling the world its rates would never go up.
Guess what, they didn’t.
With the 10yr yield on Japanese Government Bonds at 0.60% this morning, the US Treasury 10yr yield of 2.66% has a long way to go; if the USA wants to let an un-elected-central-planning-bureaucrat at the Fed make it like Japan, that is…
Who gets paid on Down Dollar, Down Rates, and #InflationAccelerating again?
- Gold and Silver Bulls (+1.9% and +4.3%, respectively last wk to +5% and +2.9% YTD)
- Real Estate Bulls (MSCI REIT Index up another +0.8% last wk to +4.9% YTD)
- Oil Bulls? Yep, that trade ripped on the jobs miss too – Brent Oil +3% last wk, most of it coming on Friday
Forget the lessons of 2011. In response to inflation expectations rising, we need the Fed to tell us we “need more inflation”… so that we can slow real-inflation-adjusted-growth more!
There’s “inequality” in America, so we definitely need to ramp up those prices at the grocery store and at the pump again. Definitely. No question. We need to re-ramp some asset prices and pulverize the purchasing power of the poor.
Captain Keynesian textbook will be quick to read this and say:
- But inflation is low, CPI is only 1.2%
- And if inflation rises, bond yields will rise …
- Because, the government says so
After deflating a small part of the mother of all inflations (Global Inflation’s all-time highs of 2011-2012), anyone who thinks there’s A) no inflation and B) no problem with inflation doubling sequentially from 1% to 2% needs their head examined.
If inflation expectations rise, commodities, wages, household debt levels, and breakevens rise (US 5yr Breakevens up another +4bps last wk to 1.93%); the 10yr bond yield won’t.
Why? Because the Fed has 0% credibility in fighting real world INFLATION. That’s why over 80% of the movement in the long-end of the yield curve can be explained by rising and falling GROWTH expectations.
In other news this morning:
- Dollar Down
- Rates Down
- US Equity Futures Down
No I didn’t buy the bounce last week (the Russell2000 actually didn’t bounce, it was down another -1.3% to -4% YTD – another growth slowing on the margin signal). Sorry, this is not 2013. Everything is the same until it isn’t.
Our immediate-term Global Macro Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer