This note was originally published at 8am on October 27, 2014 for Hedgeye subscribers.
“Don’t call it a beachhead…”
That’s what Hitler told his field marshals after the Allies took the beaches of Normandy in 1944. He called it the “last French soil held by the enemy… and that Cherbourg was to be held at all costs.” (The Guns At Last Light, pg 105)
Evidently, it was a beachhead.
Back to the Global Macro Grind…
A reporter from Marketwatch pinged me this morning asking what I thought the “biggest lie is that investors are telling themselves?” After reading a few consensus Bloomberg headlines that “deflation is good” my answer was simple:
The biggest lie US stock market centric investors are telling themselves right now is that the bond market has it wrong, and US growth isn’t half of what they thought it would be 10 months ago.
But , whatever you do, don’t call it bad. The same consensus that said the upside surprise in #InflationAccelerating from JAN-JUN was “good for stocks” are now saying that the #Quad4 deflation of that inflation is “good” too.
Like two bad golfers who are staring down breaking bogey puts from 9 feet in the rain and wind, it’s all “good, good.”
Back to reality…
Is 1 up week in the last 5 for the SP500 good? How about 2 in the last 8 weeks for the Russell 2000? What about both bond yields (10yr -25% YTD) and Oil prices crashing -25% since June? Oh, and 3 of the 4 BRICs falling like the real ones (Brazil, Russia, China) - all good?
You show me one of the many consensus economists, strategists, etc. whose 2014 call for - 3.25% on the 10yr; +10-15% on the Dow, SP500, Russell; and +3-4% GDP growth – was based on worldwide #deflation, and I’ll send them a Hedgeye hat.
Confirmation bias in being bullish on growth all of the time is what it is, but it’s not getting people paid this year. Looking at last week’s #Quad4 deflations (that continued, despite the Russell 2000 bouncing +3.4% to down -3.9% YTD):
- WTI crude Oil -1.3% to -12.6% YTD
- Russian Stocks -3.4% to -28.1% YTD
- Brazilian Stocks -6.8% to +0.8% YTD
And with Dilma Rousseff winning Brazil’s presidency this weekend (stock market indicated down another -5-6% pre-open), it appears that the anti-dog-eat-dog-socialist contract #deflation in that part of the global demand construct isn’t good either. It’s bad.
In Hedgeye #process speak:
- Quad 1 (inflation slowing and growth accelerating) is good
- Quad 4 (both inflation and growth slowing, at the same time) is bad
That’s it. We’ve already constructed a framework to talk about these trivial matters so that the people I used to pay on the sell-side can be held to account. If both growth equity bulls and bears agree that inflation is deflating, the only debate left is on growth.
If you’re in the #Quad4 camp (and you have to buy stocks) there are only 3 S&P Sector allocations you’d be net long of right now:
- Healthcare (XLV)
- Consumer Staples (XLP)
- Utilities (XLU)
And I’d weight them in that order. Since Healthcare stocks (XLV) led last week’s rally (+6.6% on the week to +17.6% YTD vs. something like the Dow which was only +2.6% on the week to +1.4% YTD), that was only confirmation that we are in #Quad4.
If we were in Quad 1 (and growth was accelerating again), early cycle stocks like housing and consumer discretionary would be leading to the upside (and big things like Retail Sales and New Homes wouldn’t be missing). Consumer Discretionary (XLY) lagged last week and is still down -0.7% YTD.
I’m not saying we’ll never be in Quad 1. That’s where markets went in the 1st half of 2009 and there were very few macro strategists who shifted from bearish on #deflation to bullish on consumption back then. Most were forced to call #Quad4 bad, after missing it the whole way down. Timing matters.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.12-2.31%
WTI Oil 80.05-83.78
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer