This note was originally published at 8am on September 05, 2014 for Hedgeye subscribers.
“Too close for missiles, I’m switching to guns.”
As a Thunder Bay boy with a lot of testosterone growing up in the 80’s, there weren’t many movies that beat Top Gun. Admittedly, I’m a little competitive, so pardon my passion this morning – “Goose, it’s time to buzz the tower.”
“The son of a bitch cut me off!” in telling the world my call on the Long Bond (TLT) is wrong yesterday. I don’t know the guy, so it’s not personal. I just flat out disagree. That guy, you know – the New Jersey Consensus TV folks love him. His name is Tepper.
Tweeters say that David Tepper A) has a lot more money than me and B) has killed it on the levered long side since 2009. He also flamed out in 2008 (down -29.61%), so on his rising rates call, I think he’s beatable. “I think I’ll go embarrass myself with Goose now.”
Back to the Global Macro Grind…
What we need in this game is more head to head debate. Pro to pro. When someone flips me off with the other side of my position, I want to crush him. I don’t care how much he’s worth or what he’s wearing. I wear a $29.99 watch from WalMart, and I like it.
While I’d love to debate Tepper live on interest rate risk (which I still think is to the downside), the reality is that probably won’t happen. (if you know him and he’s game however, I have a nice little 2.0 studio in Stamford called @HedgeyeTV).
Debating big macro topics isn’t personal. It’s what those of us who want to be the Top Gun wake up thirsting for at the top of every risk management morning. Last year I was making the call that rates would rise alongside both US growth expectations and the Fed being forced to taper. This year I reversed the call saying that rates would fall as y/y #inflationAccelerating slowed real US growth.
Yeah, sweet call Mucker. “Take me to bed or lose me forever.”
God didn’t call me with the rates call. My team and I made this call the old fashioned way, using our own models and process. When it comes to what other players out there think, we respect their airspace, but when we get in tight in a dog fight like this, we aren’t going to back down.
Here are 10 things to think about in terms of why rates are going lower (bonds higher) from here:
- US GDP growth slowing sequentially in Q3 vs Q2 of 2014
- US GDP growth continuing to slow, year-over-year, in 2014 versus the Q3 2013 #GrowthAccelerating top
- US GDP entering an early cycle slowdown (bearish on Housing, Consumer, Regional Banks)
- US Housing demand not responding to the downside surprise in interest rates
- All of Europe slowing in 2H 2014
- Japan slowing Q4 2014
- Japanese and German 10yr yields of 0.53% and 0.96%, respectively
- Institutional Fund Flows reverting back to their slow-growth mean (into bonds, out of stocks)
- US 10yr Yield immediate-term TRADE resistance = 2.51%
- US 10yr Yield intermediate-term TREND resistance = 2.81%
The biggest differentiator in our models versus those who were bearish on rates in 2013 (and bullish on them in 2014) is our rate of change forecasts on both growth and inflation.
I have stopped calling it our Growth, Inflation, Policy Model and renamed it our PIG model (same factors, in reverse). Why? Because un-elected central planners are pigs when it comes to devaluing the purchasing power of The People in exchange for asset inflation.
To review how all 3 (Fed, ECB, BOJ) of these central planning committees think:
- When growth slows, they get easier (print money, or threaten to do “whatever it takes”)
- As they get easier, their currencies fall, and the real cost of living in their countries rises
- As cost of living rises, real consumption growth falls faster, and they ease again
Top 2 headlines on Bloomberg (Economy Go!):
- “Draghi Sees Almost 1 Trillion in Stimulus”
- “Aso Signals Japan Prepared To Boost Stimulus”
Aso, as in the one who tore the Japanese people a new one via the Abenomics Policy To Inflate that took Japanese Real Wages to -4-5% year-over-year. Then they blamed the weather. #Nice
If the USA shows as much as a sniffle in this morning’s jobs report, what do you think Yellen’s response is going to be? Tighter or easier? We’re one or two bad labor headlines away from the US doing exactly what Draghi just did.
Unlike Tepper, I fly commercial. But I can still change my position whenever I want. For now, if I am right on growth slowing and the Fed’s proactively predictable reaction to it, Janet is going to be my Japanese wing-woman on bonds.
Out immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.32-2.46%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer