This note was originally published at 8am on September 23, 2014 for Hedgeye subscribers.
“The government which governs the least, governs best.”
After the election of 1800, Alexander Hamilton didn’t like the aforementioned Presidential acceptance speech from Thomas Jefferson. He called it the “symptom of a pygmy mind.” Jefferson sounded pretty darn smart to me.
What wasn’t smart was what Hamiltonian central planner and New York group-thinking Fed head, Bill Dudley, said about the purchasing power of the American people (the US Dollar) at a Bloomberg conference in NYC yesterday:
“We would have poorer trade performance, less exports… and if the Dollar were to appreciate a lot, it would dampen inflation… making it harder to achieve our objectives.” I couldn’t make that up if I tried. In stark contrast to the Reagan/Clinton administrations, who trumpeted Strong Dollar (and raised rates), this is how the Bush/Obama economic teams thought/think.
Back to the Global Macro Grind…
Evidently, alongside his protectionist big government spenders at the US Treasury, Mr. Dudley is lost in some 18th century British time warp. And you know what, you’re going to have to deal with it. Because it’s not going away. In an economy that is 70% consumption, it’s all about the “exports”, baby!
To put this day in American history in context, Bloomberg’s “50 Most Influential” are mostly government guys. My partner, and Director of Research @Hedgeye, Daryl G. Jones, was at their conference yesterday (Mike, we’re a big customer – love the data product!). From raging Keynesian, Jason Furman, to Jack Lew, this was quite the central planning affair.
To recap yesterday’s headlines, in addition to Dudley talking down the Dollar and rates (good for our Long Bond (TLT) position):
- Lew wants to limit inversions
- Jason Furman wants to spend
- Larry Summers wants a “major spend”
In other words, when all monetary policies fail to create real, sustainable, economic growth, the USA needs to move the goal posts (again) and spend, spend, spend. Isn’t that just wonderful.
In other news…
- The BABA #Bubble stopped inflating yesterday (Dudley, get on that)
- The Russell 2000 lost another -1.7% on the day, reiterating its bearish TREND for 2014
- The 10yr Bond Yield is falling (again) this morning to 2.54%, -16.2% YTD
Oh, and there are some bombs dropping in the Middle East again too, but no worries. At 55x trailing earnings, and 42% of the names in the Russell 2000 crashing (-20% or more from their 12 month peak), the US stock market is “cheap.”
Talk is cheap. Especially the central planning kind. Remember the narrative that 0% rates forever were going to provide Americans their housing dream? Well the news on that front sucked (again) yesterday, as Existing Home Sales for August slowed (again).
And what do you think US government monetary and fiscal policy is going to do as Housing and Employment gains from 2013 slow?
A) Get tighter on interest rates and spend less
B) Get tighter on rates and spend moarrr
C) Get looser on rates and spend, spend, spend
Alex, I will take C).
As opposed to betting alongside consensus (which still thinks rates are going to rise), this Mr. Market chose C) yesterday too:
- Housing stocks (ITB) got crushed on the “news” -2.1% to -6.8% for 2014 YTD
- Russell 2000 diverged, big time, from the big cap Dow, -1.7% to -3.0% for 2014 YTD
- Consumer Discretionary (XLY) was down -1.4% yesterday, underperforming Utilities 2x
Yep, when US GDP growth expectations slow, you buy the Long Bond (TLT = +13.1% YTD) and anything that looks like a #YieldChasing bond (Utilities), and you like it.
The biggest risk to buying anything US equities (especially REITS and Commodity linked stocks) is that we are right in our US economic projections and entering what we call Quad 4 (where both inflation and growth are slowing, at the same time).
With that, my pygmy mind (I’m 5’9 in the 1994 hockey program, standing on pucks in my socks) agrees with Mr. Dudley, wholeheartedly. If these guys turn this place into Japan, they won’t be achieving anyone’s growth or inflation “objectives.”
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.42-2.59%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer