This note was originally published at 8am on August 13, 2014 for Hedgeye subscribers.
“Year after year we have had to explain why the global growth rate has been lower than predicted.”
That’s a quote from earlier this week where the new vice chair of the un-elected-central-economic-planning-committee (Federal Reserve), Stanley Fischer, was way too honest about the Fed’s growth forecasting track record.
Since I was seeing Institutional investors in Boston for the last few days, I kept suggesting that there was no irony in Fischer’s timing – with Q3 GDP Slowing in the USA, the Fed is getting ready to get more dovish.
Janet Yellen followed Fischer’s lead (Reuters article yesterday) saying that she is “resolved to not raising rates too soon.” That’s code for push out the dots (Hatzius). As an early-cycle slowdown manifests in the US, you’ll be looking at 2016 (or beyond) for a rate hike.
Back to the Global Macro Grind…
Here’s an abbreviated summary of investor Q&A that the big man, Darius Dale, and I answered in Beantown for the last two days:
Q: If the rate of change in real US economic growth continues to slow, what are the odds of Yellen’s Fed getting more hawkish than the Bernanke Fed was forced to become in the face of 2013’s US #GrowthAccelerating?
If they did, wouldn’t that be interesting! There was this non-linear strategist by the name of Volcker who did that. Janet won’t.
Q: if the Fed eases (if only rhetorically), do you buy or sell long-term Treasuries?
But, but, ‘I can’t buy the long bond (like I did during 2011 #GrowthSlowing when the 10yr went to 1.7% because it’s expensive…’ Right, right. And, as an alternative to “expensive” safety, the Russell is “cheap”…
Q: If the US goes into a recession, do you buy the Russell 2000 here?
After over 5 years (62 months) of US economic expansion, it’s pretty clear to us that Consensus Macro isn’t anywhere in the area code of being set up for an early cycle US consumer recession. The main reason for that, of course, is that after they missed calling the 2007 top and 2008 decline, most of consensus didn’t come out from under the Old Walls and realize the US was in an expansion until 2013!
Q: How dare gravity (the cycle) surprise both backward-looking-linear-economists who are looking for 3% GDP growth (every quarter for the next 6 quarters) and consensus all at the same time?
A: At first, slowly – then all at once
With bond yields at the long end of the curve falling, US Housing stocks (ITB) leading yesterday’s losers (-0.9% on the day to -9.5% YTD), and the Russell 2000 failing @Hedgeye intermediate-term TREND line of resistance again (-0.8% to -2.7% YTD), this early-cycle slowdown is starting to look, well, like a classic economic cycle.
Q: When does Consensus Macro fold on growth expectations?
A: By year-end
The real smart money (the macro money that’s actually been making money) gets that economic cycles are always testing us to hear Mr. Macro Market’s message – and, as Ray Dalio would say, they are not that sympathetic.
This morning I’ve outlined our immediate-term TRADE risk ranges with @Hedgeye’s proprietary intermediate-term TREND signal in brackets (you can get all 12 relevant macro ranges in this format in our popular Daily Trading Ranges product):
UST 10yr Yield 2.39-2.48% (bearish)
SPX 1889-1946 (bearish)
RUT 1107-1148 (bearish)
DAX 8922-9366 (bearish)
VIX 13.82-18.18 (bullish)
USD 81.17-81.66 (neutral)
EUR/USD 1.33-1.34 (bearish)
Pound 1.67-1.69 (bullish)
Brent Oil 102.32-104.95 (bearish)
Natural Gas 3.74-4.03 (bearish)
Gold 1300-1323 (bullish)
Copper 3.12-3.20 (neutral)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer