#Deflation Risk

Client Talking Points

OIL

What this #crash tells you is how the perpetual inflation expectation of all major asset prices ends – at first slowly, then all at once. WTIC $69 is -36% since June; the low-end of our intermediate-term TREND range = $64.45; do not underestimate the correlation impact this has to both levered equities and high yield energy debt.

RUSSIA

Breathtaking move for the oligarchs here as the Russian Trading System loses another -3.1% this morning (-30% year-to-date) and the flow through to stock markets like Norway’s (-3.4% this morning), Canada, etc. is obvious.

UST 10YR

UST 10YR continues to #crash (-27% year-to-date) to 2.20% this morning. The world is now buying certain stock markets on the explicit #GrowthSlowing signal that the bond market is issuing (i.e. the new catalyst is an easier BOJ, ECB, PBOC, and… yes Fed!); U.S. CPI can easily break down through 1% in Q1 now – long the Long Bond still our best macro idea #2014

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).

XLP

The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road

TWEET OF THE DAY

Italy's unemployment rate rockets to +13.2% #NoWorries Draghi is on it

@KeithMcCullough

QUOTE OF THE DAY

No one can whistle a symphony. It takes a whole orchestra to play it.

-H.E. Luccock

STAT OF THE DAY

Energy Stocks (XLE) were -1.3% Wednesday, down -3.6% year-to-date.