This note was originally published at 8am on August 27, 2014 for Hedgeye subscribers.
“The perpetuation of debt has drenched the earth with blood.”
No volume, no worries. We’re at the all-time bloody SPY highs, baby. Didn’t you hear? This time is different. Ask the guys who said bond yields would rise as US growth accelerated (our call in 2013) throughout 2014, who are now saying that US growth will rip, as bond yields fall?
Since I started playing this game in the late 1990s, most of the time was supposed to be “different” (newsflash: it wasn’t). While the stock, bond, and commodity market bubbles have all had different narratives, one thing is not different – prices go up, then down, a lot.
Another thing that has not changed, for literally 200 years, is the bull/bear debate on US government debt, central planning, and easy money. It’s ole school Jefferson vs. Hamilton. And, until the next stock market bubble pops, to some Hamilton will appear to be right.
Back to the Global Macro Grind …
The stock market is not the economy. Drawing down US National Savings in order to A) keep up with the Policy To Inflate USA’s cost of living to all-time highs and B) perpetuate a levered slow-to-no-growth real economy is not the path towards long-term prosperity.
But, Keith, the stock market is up. Indeed. So is Argentina’s.
Argentina is basically in default, but its stock market was up another +1.5% yesterday to +78.4% YTD. If only CNBC could do an inversion from New Jersey to Buenos Aires, they could bounce their ratings off all-time lows trumpeting Argentina’s big government success.
Alexander Hamilton would have been the darling of big debtor, money printing, and taxing TV too. He did, after all, promote a US National Debt as a “public blessing.” Whereas the more libertarian minded Thomas Jefferson said:
“I consider the fortunes of our republic as depending on the extinguishment of the public debt.”
-Hamilton’s Curse (pg 38)
So which one is it that drives your family or country’s fortunes – debt or savings?
As you can see in the Chart of The Day (pg 30 in our current Macro Themes slide deck – if you’d like a copy, ping sales@Hedgeye.com), the US Personal Savings Rate (% of Disposable Income) has been falling for the past 3 years (as the stock market makes new highs).
How do you solve for sustainable Investment Growth in America if you can’t solve for S (Savings) = I (Investment)?
I’m pretty sure that the answer to that is you get everyone to borrow (lever up) to either buy growth or, in Kinder Morgan’s (KMI) case, to pay the dividend. Oh, those juicy dividends. Gotta have them - especially if the risk free rate of return on American Savings is centrally planned at 0%.
Who is dumb enough to put money into a savings account that earns 0%? Throughout this summer I have taken my Cash position in the Hedgeye Asset Allocation Model from 10% to 56%. “So”, evidently me. Why?
- Raising cash in both 2000 and 2007 worked for me (they were cycle calls)
- I’m not a big fan of drawing down my net worth 30-60% every 7 years and telling my family everyone else missed it too
After an economic cycle plays out (we’re going on 63 months into a US economic expansion), if I’ve raised cash at a measured pace, I’ll have it to re-invest it in my business when the proverbial poop hits the fan (see 2008-2009 Hedgeye Risk Management ROIC for details).
But that’s just me. I like to save (raise cash) so that I can invest counter-cyclically.
What does being counter-cyclical mean? It means the opposite of what the Old Wall pressures companies and investors to do, which is chase returns and invest in inventories, capex, etc. at the end (instead of the beginning) of a cycle. In public co. CYA speak, most CFO’s are pro-cyclical.
Which brings up the most important part of my decision making process – the bloody cycle!
You either agree with me or not here, but at SPX 2,000, you do have to make a decision. You either invest up here, or you book gains and raise cash for a rainy day. Which means you have to have a view on where we are in the economic cycle:
- If you think it’s different this time, you buy early cycle stocks (Russell 2000 is only +0.8% YTD, gotta be “cheap”)
- If you think it’s not (falling bond yields and compressing yield spread = growth slowing), you sell early cycle stocks (and buy TLT)
If this time is different, you don’t have to ever worry about things like no-volume (Total US Equity Market Volume was -13% and -39% vs. its 3 month
and YTD averages yesterday), peak debt leverage ratios to peak cash flows, or the Russell 2000 trading at 55x trailing earnings.
All you have to do is wake up at 9AM every day and tweet me that we’re at the bloody highs.
Our immediate-term Global Macro Risk Ranges are now (all 12 big macro ranges, with intermediate-term TREND signals in brackets, are in our Daily Trading Range product, every day):
UST 10yr Yield 2.34-2.44% (bearish = bullish Long Bond)
SPX 1980-2011 (bullish)
RUT 1138-1178 (bearish)
BSE Sensex 25991-26876 (bullish)
VIX 11.06-13.15 (neutral)
USD 82.01-82.94 (bullish)
EUR/USD 1.31-1.33 (bearish)
Pound 1.65-1.67 (bullish)
WTI Oil 92.34-97.41 (bearish)
Natural Gas 3.81-3.99 (bearish)
Gold 1271-1299 (bullish)
Copper 3.16-3.25 (bullish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer