This note was originally published at 8am on April 25, 2014 for Hedgeye subscribers.
“Confucius preached a philosophy of harmonious submission.”
“The Chinese world, he believed, would prosper not through violence, but through careful maintenance of hierarchy” (The Opium War, pg 84). Putin is not Chinese. And most American patriots don’t harmoniously submit to class hierarchy or what the government tells them about inflation either.
If you believe that a country’s monetary policy is not causal to both the value of its currency and the domestic inflation that is priced in that currency, you are submitting to one of the great academic frauds of the 21st century.
If Putin didn’t believe that the only way to stop the Russian Ruble from crashing further was to raise interest rates, why has he done that, twice, since March? Ruble down = inflation up = social unrest up. If you want someone to preach that, Chavez is dead.
Back to the Global Macro Grind…
I know, what a cheery note to wake up to. After watching the social and biotech bubble stocks close down on the day yesterday, I’m all beared up and grumpy. Inclusive of the iSplit ugrade from AAPL yesterday, don’t forget the Nasdaq is still -4.8% from its 2014 bubble high.
To review what every population since the beginning of, well, time has been beared up about:
- DOWN currency
- UP inflation
- DOWN real, inflation adjusted, economic growth
Now, to be fair, if you are long of either cost of living (inflation) and/or the output of Americans getting paid nominal (slow growth), you are absolutely crushing it for 2014 YTD. Here’s the Global Macro asset allocation that is putting a smile on that grumpy Mucker face:
- Long Inflation via inflation (commodities and/or companies, like Energy (XLE +6% YTD), who benefit from inflation)
- Long inflation via inflation protection (TIPs)
- Long inflation slowing growth via Gold, Bonds – or anything that looks like a bond (Utilities, REITS, etc.)
But, if you are long growth (real, not nominal) in countries like:
You are not smiling. Countries attempting to have their people submit to the broken promise of currency devaluation via debt monetization being the best long term path to income disparity… not good.
- Japanese Equities -10.9% YTD
- US Consumer Discretionary Equities (XLY) -3.5% YTD
- Russian Equities crashing -22% YTD
Putin’s issues are much more visible than Japan’s right now (BREAKING: “Tokyo Inflation Quickens To Fastest Since 1992” –Bloomberg), because most humans (not you!) are too economically illiterate to know the difference between nominal and real growth, until it’s too late. So you just need to front-run them.
For a market based economy, when is it too late?
- When your currency is crashing and local inflation starts to rip your people a new one
- Then your stock market starts to crash…
- And finally, your bond market starts to care about the causal currency and inflation risk factors, all at once
Right now, that’s Russia. Putin’s 10yr $10B bond auction effectively failed earlier this week, so this morning (after raising rates from 5.5% to 7% last month) he had his boys raise rates from 7% to 7.5% in order to “protect the people from inflation.”
I‘m hearing he bought Russia’s largest social media company (and probably had a few fingers lopped off a few Ruskies who weren’t cooperating harmoniously with his narrative too), but that’s just a rumor!
Putin gets paid in Petro Dollars. So I wouldn’t be surprised if he tries to solve for the aforementioned trifecta of sovereign risk (Russian CDS up to 282 bps wide now – a 2 yr high) by firing up the geopolitical risk news flow. That, and team Krugman/Japan/USA printing more moneys than god could, tends to be bullish for oil.
It’s too bad US Consumers can’t get an iSplit at the pump. Submitting to ideas like that would require Michael Lewis and Janet Yellen to team up on 60 Minutes Sunday night, and announce that US monetary policy is broken, and we need to raise interest rates to protect the purchasing power of the “little guy.”
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.59-2.71%
Brent Oil 109.12-110.86
Natural Gas 4.55-4.81
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer