This note was originally published at 8am on April 28, 2014 for Hedgeye subscribers.
“One man with courage makes a majority.”
The broad based economic progress of the 1794-1847 period in American free-market-capitalist #history remains unrivaled. In the thick of it, many called Andrew Jackson’s 1828 sweep to become the 7th President of the United States, “the era of the common man…”
“Jackson represented the victory of an expanded electorate, a rebuke of the old elite… To many Americans, the president embodied the energy, mobility, and enterprise that they believed defined their nation.” (The First Tycoon, pg 84)
Shocking, I know. The People didn’t need the Federal Reserve to believe. In fact, leaders with courage ran against it; shutting down initial iterations of a US central bank, twice! On Friday, Janet Yellen said there “may be a flaw in how the Federal Reserve forecasts inflation.” Believe her. Until we abandon this un-elected US Policy to Inflate, the common man, woman, and child in America is going to eat it.
Back to the Global Macro Grind…
Eat it? Yep. Chow down, rinse it back with some coffee and OJ, and like it.
If you back out your rent, food, gas, education, etc. (cost of living), you may not have noticed the following last week:
- Corn prices up another +2.4% last week to +17.3% YTD
- Nickel prices up another +2.4% last week to +31.5% YTD
- Coffee prices up another +1.4% last week to +79.8% YTD
- Orange Juice up another +1.3% last week to +16.1% YTD
If you want to call that cherry picking, fine. Eat some of those too. But inflation continues to slow US consumption growth. And all 3 major US market intermediate-term TREND signals (currencies, stocks, and bonds) continue to agree with the same. On that score:
- US Dollar Index was down -0.1% to -0.4% YTD (and remains well below our long-term TAIL risk line of $81.17 resistance)
- US Consumer Discretionary (XLY) and Growth (Russell 2000) stocks were -0.5% and -1.3% last wk to -5.1% and -3.5% YTD, respectively
- US 10yr Treasury Bond Yield dropped another 6 basis points on the week to 2.66% (down -37 bps YTD)
Meanwhile everyone and their brother from the #OldWall in NYC to Washington and now California (PIMCO calling for “high 2% US Growth”) continue to confuse nominal growth (inflation) with real (inflation adjusted) growth.
On Wednesday the US will release GDP for the 1st quarter, and it will likely:
- Have a 1% handle on it (down hard from the sequential peak of +4.1% in Q413)
- See the Deflator (yes, you have to subtract it from nominal GDP) continue to rise from its sequential Q213 low
In other words, on the 2 core factors that matter in our GIP (Growth, inflation, Policy) model:
- INFLATION = will be accelerating
- GROWTH = will be slowing
More commonly called stagflation, the common man’s wallet gets squeezed when this starts to happen. That’s not my opinion, that’s US economic history in the post Greenspan era (Bernanke and Yellen).
This is the 3rd time Hedgeye has made a big directional call that #InflationAccelerating will slow US consumption growth, with the other two being:
- Q1 of 2008
- Q1 of 2011
Yep, it’s cyclical. And the ways to measure it in real-time are manifest. But if you want to throw a little Putin on top of your inflated corn flakes this morning (Oil prices accelerating), here are moarrr of them:
- US Treasury 5yr breakevens (Bernanke used these until they went against his ideology) +5bps last week and +17bps YTD
- CRB Foodstuffs index = +21.5% YTD and Treasury Inflation Protection (TIPs) testing YTD highs
- Slow-Growth #YieldChasing sub-sector styles of the US stock market like Utilities +13.5% YTD
What’s really impressive about the inflation-slows-growth trade is how obvious it is at this point. With the biotech and #SocialBubble stocks (FB, TWTR, YELP, etc.) getting pounded again on Friday (Nasdaq down -0.5% on the wk to -2.4% YTD), Utilities (XLU) closed the week up another +1.9%!
Sure, if you’re long Gold (up +0.5% last week to +8.1% YTD), Bonds, or any stock that looks like a bond, you’re having a great year. As you should be. You are in the 20% of America that A) has savings to invest into #InflationAccelerating and B) doesn’t have to eat it like the common man does.
In other news, not only is Bill Gross way late in getting bullish on US Growth, but consensus bear hedge fund bets in the bond market are. Last week’s net short position (CFTC non-commercial net futures/options contracts) in the 10yr Treasury Bond ramped to -93,722 contracts. If you have courage, you’ve been long consensus being wrong on #RatesRising all year long.
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 2.59-2.71%
WTIC oil 99.98-105.61
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer