This note was originally published at 8am on February 27, 2014 for Hedgeye subscribers.
“Double, double toil and trouble. Fire burn, and cauldron bubble.”
They say Shakespeare wrote Macbeth sometime between 1603-1607. But my contacts tell me he could have written it in 2007. The prescience of his dark tragedy would have been a big call for CNBC.
But, from an economic forecasting and risk management perspective, what has really changed since late 2007? On mute, I can still see the same old broken sources telling me that the future slopes of growth and inflation are going to be what they were in the prior twelve months. Huh?
It’s brilliant really. To get paid to forecast the weather on a 6-12 month lag, that is.
All the while, the anti-consensus fires begin to burn as the next macro risk starts to bubble. What do I think right now? I think that US inflation can absolutely double in 2014; double, double, cut US GDP in half, and there will be trouble.
Back to the Global Macro Grind…
Turning bearish might sound like it comes right out of Scene 1 of Macbeth. I’m in my dark man-cave, I’m wearing jorts beside a boiling cauldron and three witches. Thunder strikes as my arthritic hockey knuckles pound the keyboard. “Thrice the brinded cat hath mew’d!”
Seriously. Let’s get real here. All the boys know that my first creative writing paper in the English department @Yale was given back to me with the word “ungradable.” While I may have only had upside from there, I have no business writing you poetry this morning.
Back to the call. If I boil down our entire US macro view right now to “inflation doubles, and growth gets cut in half” what does that mean?
- #InflationAccelerating – US Consumer Price Inflation (headline) goes from 1% y/y to 2%
- #GrowthSlowing – US GDP growth gets cut in half from our #GrowthAccelerating call high of +4.12% in Q314
So easy a Mucker can do it.
I’ve been on the road seeing some really smart and really successful customers of ours in NYC and Connecticut for the last few days and the feedback to our call is:
- “You’re the only strategist hammering on #InflationAccelerating right now”
- “When do you think it will matter?”
While I think it will matter a lot more as the year progresses, we are quickly approaching the ides of March… and with the US stock market still down for the YTD, I’d argue it already matters. It already matters.
Gold is ripping (up again this morning to +11% YTD), and plenty of bonds (and/or stocks that look like bonds; Utilities +7% YTD) are crushing consumption growth stocks too. That’s where this call really matters – from both a sector and investment style perspective.
To be clear, my being bearish on inflation’s impact on the slope of US growth expectations doesn’t mean I am universally bearish on every asset class you can buy. My asset allocation model is basically the opposite of what it was on this day in February of 2013:
- Long Commodities
- Long Foreign Currencies vs the US Dollar
- Long Fixed Income
- Net Long European Equities
- Net Short Japanese Equities
- Net Short US Equities
As you know, I’m big on process. So you shouldn’t be surprised about my re-positioning. As we move towards what we call “Quadrant 3” in our GIP (Growth, Inflation, Policy) risk management process, all I’m doing here is what the playbook tells me to do.
Any monkey can be long something. Over 90% of #OldWall ratings aren’t sell. So when I whip up the bearish brew, I get that people care more about how that might taste than telling them to buy Twitter (we still think you should be short that btw).
So when I say I’m “Net Short US Equities”, there are a few explicit positions you can see on that front:
- More US equity SHORTS than LONGS in #RealTimeAlerts
- Short Consumer and Financials (XLY, XLP, and XLF) vs long Healthcare and Energy (XLV and XLE)
If you think it’s a low-stress life to be publicly publishing my research team’s Best Short Ideas in a market that is just coming off its all-time highs, think again. The venom we’ve received (from non-customers) on short ideas like Kinder Morgan (KMI) and Nationstar (NSM) is real.
But I like it.
“Swelter’d venom sleeping got,
Boil thou first i’ the charmed pot”
Ah, the poetry of it all. I’m looking forward to seeing how the market reacts to its first big slowdown in US GDP tomorrow morning.
Our immediate-term Macro Risk Ranges are now (our Daily Top 12 ranges are in our Daily Trading Range product). We’ll be hosting a Flash Call on Brazil at 11AM EST today. Please ping sales@Hedgeye.com if you’d like access.
UST 10yr 2.64-2.80%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer