This note was originally published at 8am on September 11, 2014 for Hedgeye subscribers.
“The Panic of 1819 was the first boom-bust cycle of the economy caused by government monetary policy.”
“It was an inevitable consequence of the Hamiltonian system of government debt accumulation combined with a government-run bank that prints money in order to fund the debt.” (Hamilton’s Curse, pg 68)
Sound familiar? It shouldn’t. Unless you’ve studied economic history, you might actually think that all of this won’t end in panic. Unless it’s different this time, it always has. Give it some time.
While a sub 2% US GDP growth economy could hardly be described as a “boom”, we have had some booming bubbles develop within the Fed’s 0% experiment. From real estate, to MLP #YieldChasing, to the latest Silicon Valley bubble, I think we’ll all look back and call it epic.
Back to the Global Macro Grind…
Forget about the bubble talk for a second, rewind the tapes (or just watch it trade in real-time today) and watch Apple’s (AAPL) volume and intraday price moves. That’s no bubble – that is a mania.
Manias are much more fun to watch than bubbles – people do the craziest things. Watch Go Bro (GPRO) trade, or watch the new squeeze quant algos jam these no-borrow-high-short-interest stocks. It’s pure, unadulterated, price momentum chasing.
While mo mo manias are entertaining, the bubble in momentum chasing US equity market cap is downright frightening. Pop Quiz: if you add up Apple, Facebook, and Alibaba’s proposed market caps, what do you get?
A: $1 TRILLION Dollars
Yeah, that’s normal. And so is paying $350 for an iUgly watch and, at the same time, telling the world there is no inflation “because there’s deflation in technology” (in other news, fully loaded with Oil’s recent decline, USA’s cost of living just hit another all-time high).
If you add Google, the Top 4 in the Silicon Valley bubble get you to $1.25 TRILLION. To be fair, BABA is not really a “valley” name – the “smart money” in there didn’t want to give Alibaba $20 million. It wasn’t a “good idea” back then. So they’ll give them $25 Billion now instead!
And if you back out Exxon (just to make my storyline better), here’s what you can get for $1.25 TRILLION:
- Berkshire Hathaway = $235B
- Wal Mart = $230B
- GE = $230B
- Chevron = $225B
- Johnson & Johnson = $210B
- Citigroup = $125B
Remember that while I am sure I am wrong on my $29.99 watch from WalMart not being as cool as the iWatch, Apple (AAPL) has $600 billion reasons (market cap) why that fashion statement has been discounted by the market, just a bit.
Now, to be fair (again, I am a fair guy!) for those of you who know everything about Apple (AAPL), you’ll recall that there is a precedent for this stock blowing up (split adjusted, it went from where it is today to $55 in less than a year). Never mind what the US stock market bubble would do if AAPL dropped 50% from here (still trading at a $50B premium to my preferred iBear watch outlet, WMT), what if it dropped 5, 10, or (deep breaths) 25%?
I know. Every boom-bust bubble call needs a catalyst. Here’s mine – US #GrowthSlowing.
Oui. C’est tout, mes amis. En Francais, that means that is it.
That’s all I think I need to get right from here in order to get both bonds (long the Long Bond and anything equities, like XLU, that looks like a bond) and the stock market bubble right. I think I need to get the rate of change in US growth right.
While I don’t think AAPL will get cut in half from here, US GDP growth could, easily, from this headfake Q2 bounce of 4%. More importantly, US GDP growth could be half of consensus expectations (Old Wall consensus = 3% GDP growth and +3.3% 10yr yield), for Q3 and Q4.
And that’s our bullish scenario. The bearish one, of course, is that 1/3 of America (you and I) figures out that 2/3 of Americans are already in another early cycle recession. After 63 consecutive months of US economic expansion, that’s what booming bubbles within the cycle eventually do – they bust.
Our immediate-term Global Macro Risk Ranges are now (I update my Top 12 Macro Ranges in our Daily Trading Range product, with intermediate-term TREND views, daily, as well):
UST 10yr Yield 2.31-2.53%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer