This note was originally published at 8am on November 13, 2014 for Hedgeye subscribers.
“The vow that binds too strictly snaps, itself.”
-Alfred, Lord Tennyson
Tennyson was a beauty. He was an epic British poet throughout Queen Victoria’s era, but I think he would have crushed it on Twitter these days too (short that stock on yesterday’s #bounce, btw). His lyrics were short, and to the point.
“Break, Break, Break”… “Tears, Idle Tears”…
His poems were almost hand made for this morning’s headline news that one of our modern central planning overlords – The Abe, in Japan – is going to call a “snap election” immediately following a +20% ramp in the Weimar Nikkei. Oh snap!
Back to the Global Macro Grind…
Weimar Nikkei? Yes, as in 1919’s Weimar Republic – i.e. the said “democracy” that emerged in Germany post WWI and capitulated into currency devaluation (stealing from its People’s purchasing power) and centrally planned brain washing.
Could the Japanese vote for that?
Anything can happen. On the why would they part, I won’t review Japan’s 2014 economic data for you as I’ve written about it in multiple Early Looks this year, but here’s the quick recap: with Japanese Household Spending -5-6% year-over-year, the economic outcome of “Abenomics” sucks.
But, but… those who were long Japanese stocks for a centrally planned “economic recovery” (i.e. those who were down, in Nikkei terms -10-15% at one point this year before Abe/Kuroda devalued, again) have seen a +20% return from Japan’s October 17th low of 14,532 (as the economy continued to slow).
“So”, call being long Japan (or Germany’s stock market in 1924) for the wrong reasons, a win!
In Burning Currency terms, that is…
To be balanced, that’s probably why some of the Mo Bros (buy-high, and try to sell higha!) on Twitter who are long Nikkei now are more of a short than the company ($TWTR) itself. They would have loved the German “chart” in the 1920s too. #lol
But, after getting slammed (again) yesterday, European Equities (ex-Russia, which is down another -1.9% this morning, crashing to -26.1% YTD – and we remain short it, in Real Time Alerts), opened up on the “snap election” news.
And US Liquidity Trap chasers of mid-September (i.e. the Mo Bros who bought high SEP 19th, to be in the fetal position within 3 weeks at the October lows) are loving this bad sushi smell in the US equity futures this morning as well….
How does this end?
- #Badly, but … in the meantime,
- Either Abe wins the election and burns the Yen beyond the -30% drop it has had versus the US Dollar, or
- Abe loses, the Yen rips, the Nikkei crashes (again) – and the phase transition into #Bubbles popping continues
While plenty of the “Dow is up” naval gazers (it’s up +6% YTD btw, versus something like #GrowthSlowing Long Bond $TLT’s total YTD return of +18%) will call everything “good”, there remains a very obvious way to play the scenario of Abe winning:
SELL/SHORT: Oil and Energy stocks, bonds, and countries.
“Again!” as Kurt Russell said in Miracle – follow the central planned yield-chasing #bubbles as they pop:
- Japan and Europe burning their currencies = US Dollar Up
- Dollar Up, Rates Down = #Quad4 Deflation
- Deflation = Oil crashing (-28% since June), and Energy Stocks (XLE) down another -0.9% yesterday
You can also go downstream into the #OldWall banker sewer and short some up “upstream” MLP stocks:
- Linn Energy (LINE or LNCO, pick one, or both)
- Breitburn Energy Partners (BBEP)
- Vanguard Natural Resources (VNR)
On the long side, provided that you are still of the #GrowthSlowing view that the January 1st, 2014 Nikkei and Russell 2000 growth bulls missed (i.e. that growth would be cut in half this year, and long-term bond yields would fall), stay with our two favorite SP500 Sector Styles – long Healthcare (XLV) and Consumer Staples (XLP).
Remember, until they all “Break, Break, Break”, you don’t have to snap when the most widely held hedge in world history (short SPY) goes up. When growth and inflation expectations are slowing, there’s always a smarter bear market somewhere.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.30-2.40%
WTI Oil 75.02-78.21
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer