This note was originally published at 8am on March 24, 2014 for Hedgeye subscribers.
“Quiet is no certain pledge of permanence and safety.”
-James A. Garfield
From the innovation that flowed from the US Centennial Exhibition Fair in Philadelphia in 1876 to the uncertainty associated with the Republican Convention in Chicago in 1880, Destiny of The Republic (by Candice Millard) ranks at the top of my #history reading list YTD.
Garfield may be one of the lesser known US Presidents, but the prescience and leadership embedded in some of his quotes are quintessentially free-market American. #timeless
He embraced uncertainty; he encouraged winning and losing. He didn’t prey on the ignorance of The People; he encouraged its education. He was as progressive as any President before him. He was nothing like the politicians you have to endure today.
Back to the Global Macro Grind…
Today you have to deal with a US government (both Republicans and Democrats) that is either lying to you about real-world economics (inflation) or isn’t market-literate enough to be able to tell you the truth if it tried. I’m not sure what’s worse.
However, I am sure that whatever is left of free-markets will front-run the government’s proactively predictable behavior. While they may not be acknowledged in D.C., Burning The Buck and never calling a devalued currency inflationary are core market beliefs.
For a few days last week (actually for a day and a half), the market suspended this belief and:
- Bought US Dollars
- Sold Gold
- Sold Bonds
That’s what you should have done for literally all of Q1 of 2013 though. It’s Q1 of 2014, and the 2013 @Hedgeye TREND is over.
On Friday, everything reverted to the mean (towards the 3 month TREND):
- Dollar made another lower-YTD-high and went back down
- Gold made another higher-YTD-low and went back up
- Bonds had another great day, after v-bottoming from their Wednesday #RatesRising headfake
All the while, with the Dow Jones Industrials Index banging its head against the #OldWall to try to get itself to “up” for 2014 YTD (it’s -1.7%), food #InflationAccelerating continued with the CRB Foodstuffs Index up another +1.8% to +18.1% YTD.
Sure, oil remained under pressure (Brent Oil -1.2% last week) and that remains a bearish TREND signal @Hedgeye this morning (don’t be long oil with +406,967 net long futures/options contracts outstanding!), but that didn’t offset more of the same in terms of what components of the US equity market are delivering you the absolute return bacon YTD.
Mmm, #bacon (lean hog prices +31% YTD)…
From a sub-sector perspective in the SP500 YTD, this is what I mean by that:
- US Consumer Discretionary Stocks (XLY) -0.3% last wk (with the SP500 +1.4%) to -1.7% YTD
- Slow-growth-yield-chasing Utilities (XLU) +0.1% last wk to +6.7% YTD
In other words, whether your government calls it inflation or not, inflation slows real-consumption growth in America. So don’t get frustrated by it – just own it. #InflationAccelerating is a position that at least 10-20% of Americans can profit from.
No, that’s not a US political leadership message. It’s the winning market message – and, sadly, that is a losing one for at least 80% of America. The quiet and safety of the world buying US Dollars last year is ending. The 1-year average net long position in the USD (CFTC futures and options contracts) is +16,540 contracts, but:
- 3 months ago, the net long position went to flat
- 2 weeks ago, it moved to modestly net short
- Last week it dropped to a 1yr low of -12,167 net short
Yep, as Hemingway would say, at first the risk of your currency losing credibility happens slowly, then it happens all at once. The pledge of permanence of a #StrongCurrency advocated by Presidents like Garfield may be as worn out as (pre-1913 Fed Act days) free-market capitalism itself.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.62-2.82%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer