This note was originally published at 8am on August 25, 2014 for Hedgeye subscribers.
“Ideas have consequences.”
-Richard M. Weaver
That’s the introductory quote from Hamilton’s Curse – How Jefferson’s Arch Enemy Betrayed The American Revolution, by Thomas Dilorenzo. And oh isn’t that an appropriate thought now that our central planning overlords have talked down at us from upon high from the Tetons in Jackson Hole.
“Big ideas, moreover, can have big consequences, and there are probably no ideas in American political history bigger than the ones debated by Alexander Hamilton and Thomas Jefferson at the time of the founding.” (pg 1)
Japan has had the same failed central economic planning ideas for decades. Now both the un-elected US and European monetary policy duo of Janet Yellen and Mario Draghi and are hell bent on executing on the same. It’s the economic curse of devalued currencies. And I don’t think it will end well.
Back to the Global Macro Grind…
The number one thing I have had wrong in 2014 is how dovish Draghi was going to get in the face of what was a decent European economic rate of change acceleration. Ever since he decided to devalue the Euro in May, the European economy has slowed, sequentially.
I thought Yellen was going to be more dovish than consensus thought at Jackson Hole (she was). But I didn’t think her headline impact was going to be trumped by Draghi. He said he “stands ready to adjust” his Euro devaluation policy stance further. Whatever that means… the currency market believes him.
“So”, following the bouncing macro ball:
- Euro (vs USD) is getting smoked to fresh YTD lows of $1.31 this morning
- US Dollar Index is now breaking out to fresh YTD highs of $82.59
- Commodities (CRB) index, led by oil’s decline, are retracing most of their YTD gains
And our macro playbook would call the alleviation of the #InflationAccelerating tax (on Americans) good, on the margin. But what’s good for the country with the consumption tax cut is bad for the economy who gets the devaluation tax.
The other thing that’s not good is what the US bond market thinks:
- US Treasury 10yr Yield has fallen back to 2.39% this morning (down -63bps YTD from 3.03%)
- US Treasury Curve Yield Spread is compressing to a fresh YTD low of +189bps (bps = basis points)
- US growth expectations (Russell 2000) are still down for the YTD as well
But, but, there are no buts…
I am bearish on both US and European growth, and both US equity futures and European stocks are up on whatever it is that Draghi is going to do next.
BREAKING: Draghi Pushes ECB Closer To QE As Deflation Risks Rise –Bloomberg
That’s one of the most read headlines of this morning. Alongside Germany’s IFO (business climate index) dropping to a fresh 4 month low of 106.3 (vs. 108.0 last month) and France’s Prime Minister resigning over the economy, that is…
“So” you just have to buyem when they are up on this, right? No thanks.
If the US Dollar and rates were rising alongside US growth expectations, I’d be right bullish on being long US growth right now. But that’s not happening. The #InflationAccelerating of the first half of 2014 is sticky. In other words, you aren’t getting a cheaper cup of coffee and a rent reduction this morning.
Over time, what we call a 4th Quadrant move in our GIP Model (Growth, Inflation, Policy = GIP) becomes a big idea. But going there (both Growth and Inflation slowing, at the same time) requires a big asset price reset. This happened in Q3/Q4 of 2008, don’t forget.
I don’t think it’s 2008. I think it’s Q3 of 2014. While every economic cycle rhymes with parts of others, we haven’t seen all three of the major Currency War central planners (Japan, USA, and Europe) try to devalue (print moneys, monetize debt, bend gravity, etc.) at the same time like this.
If US and European growth continues to slow, at the same time (and both Yellen and Draghi get easier and easier into that)… and it ends well… I’ll be wrong on that too. In the meantime, 200 years after Alexander Hamilton’s Euro style Central Planning Curse was imposed on the American people, Jefferson is rolling in his grave.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.34-2.46%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer