This note was originally published
at 8am on October 16, 2014 for Hedgeye subscribers.
Let them eat debt.”
That’s how my friend Dan Alpert starts chapter 4 of a non-perma-bull book I have been reviewing as of late – The Age of Oversupply. It’s a play on Marie Antoinette telling those who were plundered by central planners in France to eat cake.
Ironically enough, it was on this day in 1793 that Marie was guillotined at the epicenter of the French Revolution. The People will only put up with negative real incomes and the all-time highs in cost of living for so long…
Right in the middle of our new bear cave (Hedgeye Headquarters in Stamford, CT), we have an office I painted pink (with fluffy white couches) that we call the Marie Antoinette Room. There’s a guillotine painted in black on the wall.
Back to the Global Macro Grind…
Yep, we do things a little differently over here. And thank God for that. If anyone who works for me bought the “bounce” in the Russell #Bubble (into yesterday’s close), we’d be having a little chat in the pink room today.
Newsflash: the world changed yesterday.
And I can’t for the life of me understand why money managers who haven’t been positioned for it for the last, say 3-6 weeks, wouldn’t respect that. There has never been a % move like that in the Treasury market (in that compressed window of time), ever. I call that part of the phase transition of market risk, The Waterfall.
The Waterfall isn’t ebola (or whatever bulls want to blame next). It’s levered-long hedge fund beta.
And until I get at least a dozen shorter-term hedge funds calling/emailing me (at the same time) and telling me we’re going to crash, we’re probably going lower.
“We”, in market terms – dammit I hate that word. This market isn’t we. That would include me, Mucker, as having some ownership in being long the US equity market. To be clear, I am long the Treasury Bond market – Long Bond style!
Back to the #behavioral point on fund manager positioning and sentiment…
Understand that this entire way down (-11.2% for the Russell 2000, -32% for the 10yr bond yield, -7.4% for the SP500), I have generally been asked about where “we bounce.”
The reason for that is pretty simple. In the Chart of The Day (exhibit 45 in our Q4 Macro Themes deck) you can see Hedge Fund Correlation to SP500 and Average Relative Performance (using a 60 month trailing correlation).
Punch-line: forget ebola – correlation to Ebeta for the levered-long beta chasing trade = +0.90-0.95
When the US equity market goes down, for real… that’s more dangerous than almost any data point you can give me other than the following 3-factor #Bubble chart (exhibit 52 in our Q4 Macro Themes deck) – Spread Risk:
- All-time low in credit spreads
- All-time low in cross-asset class volatility
- All-time high in debt outstanding
No, I didn’t need a one-on-one meeting with my favorite stock picker to come up with that… I am pretty sure that the CFO of the only company I hit the buy button on as of late in Real-Time Alerts (HCA) wouldn’t know what to do with it anyway.
Q: Who does?
A: No one
How could anyone tell you, with a straight face that, even though, they “don’t do macro”, they just know that buying the damn dip is going to work, in spite of coming off the all-time lows in volatility and highs in, well, everything?
To review why our call on rates really matters to cross asset class expectations (risk):
- Long-term rates shock consensus to the downside
- Yield Spread (leading indicator for US #GrowthSlowing) crashes -34% (10yr minus 2yr yield)
- Small caps, bank stocks, and anything illiquid credit junk gets slammed
In the non-it’s-different-this-time playbook, this is what is called an early-cycle slowdown. And from the all-time highs in debt outstanding, I don’t think piling on more of what hasn’t worked (Qe4) is going to make this better.
I am not trying to scare you, or be “not nice” about this. I like to be right as much as you do. “So”, I say, let whoever bought yesterday’s intraday bounce in the Russell #Bubble eat beta.
Tomorrow at 1PM EST I’ll be hosting a Hedgeye Flash Call “#Bubble Or Bottom”, updating our Q4 Macro Themes. Ping sales@Hedgeye.com if you’d like to participate.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.01-2.22%
Best of luck out there today,