This note was originally published at 8am on August 18, 2014 for Hedgeye subscribers.
“They got their politics on TV and were not persuaded by policy descriptions or rational arguments.”
I showered, shaved, and slapped on a suit to do Fox News in NYC yesterday (yep, just what I wanted to do on a summer Sunday). On my way out, my son Jack was riding his bike in the driveway and said to me “Dad, good luck.” I thought to myself, man isn’t this country going to need it.
The aforementioned quote comes from a book I’m reading right now that I highly recommend: The Unwinding – An Inner History of The New America. It cuts through many of the threads I’ve been trying to weave in 2014 (history, behavioral, demographics).
From Jay Z to Newt to Oprah and Sam Walton, this collection of histories contextualizes why so much of what this country has become is made for TV. Sound bites, quick fixes and bling. “Yes We…” … uh… maybe No We Can’t, from here…
Back to the Global Macro Grind…
No we can’t get back to 3-4% US GDP growth. Not this year. And probably not next year either. Never mind what you hear on TV. The real US economy is slowing in Q3. The bond market reiterated that last week, big time.
The 10 yr US Treasury Yield dropped another -7 basis points last week to 2.34%. In case you are keeping context’s score, that’s:
- A fresh YTD low for the leading indicator for the rate of change in US growth
- Down -23% (69 basis points) from where the 10yr started 2014 (3.03%)
- And isn’t in the area code of Consensus Macro’s 3.25-3.5% “forecast” for the 10yr in 2014
Alongside falling bond yields and the Russell 2000 (a proxy for US growth expectations) being -1.9% YTD what’s interesting now is that some of the more cyclically sensitive (read: LATE CYCLE) stuff like inflation and employment growth is starting to wane:
- CRB Commodities Index was down another -0.9% last week to +3.5% YTD and is now bearish TREND @Hedgeye
- CRB Food Index was flat last week (still +17% YTD) and is now bearish TRADE (losing momentum) within a bullish TREND
- Oil prices continued to fall last week (Brent -2%) and remain a bearish intermediate-term TREND @Hedgeye
Let me write that one more time – inflation and employment gains are late, not early, cycle indicators. “So”, as both the European and US economies slow in Q3 of 2014, why can’t we see both inflation and employment rates of change deteriorate from their 1H 2014 peaks?
One way to play this from a US stock market investors perspective is:
- Rotating out of Energy (XLE) stocks (which led losers last week at -0.2%)
- Rotating into more Healthcare (XLV) exposure (which led gainers at +2.4% last wk)
That’s a later cycle portfolio move than the early cycle ones we have been signaling since the beginning of the year (which we’d stay with and include):
- Short Housing (ITB)
- Short Consumer Discretionary (XLY)
- Short Regional Banks (KRE)
Getting out of late-cycle commodity inflation is also very defensive in the sense that you can’t be as “invested” as we thought you should be in #inflationAccelerating for the first 6 months of the year. You won’t hear this on TV either, but in risk management speak that means RAISE CASH.
At 52% Cash in the Hedgeye Asset Allocation model this morning, that’s the highest Cash position we have had in at least 2 years. On the 48% “invested”, my Top 3 positions (rank ordered in terms of size) would be:
- Long the Long Bond (TLT)
- Long Emerging Market Equities (India, China, Indonesia)
- Long Gold (GLD)
In other words, if I was running my old hedge fund, I’d still be running net long Bonds and International Equities in Global Macro, but scaling into net short positions in both US growth and European Equities.
While we haven’t re-signaled the short calls in places like Portugal (PGAL), Italy (EWI), or the SP500 (SPY) yet, the best way to see me do that in real-time is in our Real-Time Alerts product. From a short seller’s perspective, you won’t get that trying to learn market timing on TV either.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.34-2.43%
BSE Sensex 25689-26391
WTIC Oil 95.41-98.46
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer