This note was originally published at 8am on July 15, 2014 for Hedgeye subscribers.
“Frankly, my dear, I don’t give a damn.”
That’s what Rhett epically told Scarlett at the end of Gone With The Wind. That pretty much sums up what I think of the Goldman call to sell Gold yesterday too.
Earlier in the movie, Rhett explains the generational gap to Scarlett:
“If you are different, you are isolated, not only from people of your own age but from those of your parents… but your grandparents would probably be proud of you and say, there’s a chip off the old block… and your grandchildren will try to be like you.” (The Fourth Turning, pg 79)
And that pretty much summarizes my generation vs. The Old Wall’s boomer and GI generations. Yes, I’m generalizing to make a point. You can blame my birth year, or blame them. It doesn’t matter. History won’t care. In terms of our Global Macro #process, we are different. And that’s just fine with me.
Back to the Global Macro Grind…
If you ask the bond market what it thought of the GS call to sell Gold yesterday, evidently it couldn’t give a damn either. US 10yr Treasury Yields are back down to 2.53% this morning and remain as bearish as Gold is bullish in our model. If you want to get Gold right, get rates right.
Put another way:
- If you are bearish on Q3 US GDP growth slowing, you are A) bullish on bonds and B) bullish on Gold
- If you are bullish on Q3 US GDP growth accelerating, you are B) bearish on bonds and B) bearish on Gold (like we were in 2013)
Inclusive of yesterday’s newsy selloff in Gold, don’t forget the context of the move:
- Gold is +9% YTD
- UST 10yr Bond Yield is -17% (-51bps) YTD
So the Goldman growth bulls have some hay to bail. That’s not a personal attack – I have plenty of friends at Goldman who I hold in the highest regard. It’s just the YTD score.
Since Goldman has some very thoughtful people in their research department, this makes for an interesting bull/bear debate. From a macro perspective, their calls for 2014 are fairly uniform. Their highest profile strategists have a bullish growth and interest rate bias:
- Abby Cohen is looking for US growth to accelerate and US Equities to see multiple expansion
- Jan Hatzius is trying to get the Fed to pull forward the “dots” (raise rates sooner)
Hedgeye, on the other hand:
- Is looking for #InflationAccelerating to slow US consumption growth and perpetuate multiple compression in early cycle stocks
- And is trying to front-run the Fed’s decision-making process by predicting they get easier (as the economic data slows) in Q3/Q4
Don’t worry – “front-running” is only a bad compliance word if you’re running a bank, broker dealer, or asset management firm with some sort of inside information. I don’t do that. I just run my mouth.
On our Q3 Macro Themes Call last Friday, I went through the bull case for Gold via our #DollarDevaluation theme (ping sales@Hedgeye.com if you’d like to review our slide deck – I’ll be presenting it in London this week). The sequence of front-running predictable Fed behavior is as follows:
- On the margin, Q314 real consumption data slows like the June data did (i.e. the Fed can’t blame FEB weather anymore)
- Janet Yellen, being a very particular bureaucrat looking to dot i’s and cross t’s, will want to acknowledge that slowing
- By the SEP Fed meeting, Wall Street will be looking at a much more dovish Fed than the tapering one it had at the start of the year
If you agree with me on that:
- You short the US Dollar
- You buy more Treasuries (and slow-growth #YieldChasing equities that look like bonds)
- And you buy more Gold
What I care most about on the GS call is the impact it had on our core 3-factor risk management model yesterday (price, volume, and volatility):
- PRICE – Gold held both its immediate-term TRADE line of $1301 and intermediate-term TREND line of $1271
- VOLUME – vs the 5-day avg, futures and options contract volume was +27.7%
- VOLATILITY – implied volatility didn’t move much (it’s still down -2% and -18%, respectively, on a 1 and 6 month basis)
Put another way, Goldman can still move markets, big time, from a volume perspective. But on my score card, when A) price holds my TRADE and TREND lines of support and B) implied volatility is falling, across durations… I buy more.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.49-2.58%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer