This note was originally published at 8am on December 01, 2014 for Hedgeye subscribers.
“Deflation is every central bank’s nemesis…”
-James G. Rickards
After a wonderful Thanksgiving weekend, I know that’s what some of you are thinking about this morning – some deflation of that inflating waist-line. I sure am! Everything related to a perpetual inflation expectation of commodity prices is too.
The aforementioned quote from Jim Rickards has critical follow on thoughts to consider about #deflation: “… because it is difficult to reverse, impossible to tax, and makes sovereign debt unpayable by increasing the value of real debt.” (The Death of Money, pg 214)
Think about that from a levered upstream-Energy MLP’s perspective (Linn Energy, LINE), and you’ll get the risk management point. Deflating the oil price is difficult to reverse, impossible to “dividend”, and makes the value of their financial leverage a major concern.
Back to the Global Macro Grind…
With MLP’s (Master Limited Partnerships) down -3.4% on the week (Alerian MLP ETF), the #OldWall will yawn, and say something like “it’s already priced in” and it “outperformed”, uh, Russia (RSX), last week.
And the biggest currency crisis since 1998 (Russian Rubles -6% since Friday’s close, crashing -40% YTD) and its interconnected crashing of the Russian stock market (down another -3.4% this morning after dropping -8% last week to -32.5% YTD) is #NoWorries too…
Admittedly, the perma-bull case for global growth and inflation expectations is getting more entertaining at this point. The worse real-economic data and #deflationary realities get, the higher the Weimar Nikkei goes! (Japanese auto sales -13.5% y/y in NOV)
Away from the “Dow” being +0.1% last week, there was a lot of money to be made on the bear side of it all:
- West Texas Crude Oil continued to crash, -13.5% on the week to -28.1% YTD
- Energy Stocks (XLE) dropped -9.8% on the week to -9.8% YTD
- Basic Materials (XLB) deflated -3.0% on the week to +6.4% YTD
- Greek stocks (Athens Index) lost another -3.1% to -17.2% YTD
- CRB Commodities Index got tattooed for a -5.5% weekly loss to -9.2% YTD
- Silver moved into crash mode, dropping -5.5% on the week to -20.4% YTD
I know. No one has any exposure to any of this. Diversified 401ks have an 80% allocation to SPY and 20% to Apple (AAPL).
On the bullish side of wacky wide asset class performance #divergences last week:
- Consumer Discretionary (XLY) stocks, mean reverted to the upside, and led gainers +2.5% to +7.5% YTD
- Consumer Staples (XLP) stocks continued their fantastic year, +1.8% on the week to +14.7% YTD
- Oh, and our #fav Macro Long for 2015 (Long Bonds) ripped to fresh 6 week highs, in TLT, EDV, etc. terms
As you can see in the Chart of The Day (slide 53 of our Q4 Macro Themes Deck) we have Consumer Staples (XLP) and the Long Bond (TLT) on the long side and nothing on the short side of Consumer Discretionary, so we were cool with that.
After $107 oil not being a headwind to their thesis in Q2, the perma-bull thesis drift expectation has quickly moved to “Oil Down is good for the consumer” and we get that (so we’re not short XLY), but that doesn’t mean the bull thesis is going to play out.
BREAKING: “Black Friday Fizzles – Retail Sales Down -11%” –Bloomberg
“Spending tumbled an estimated 11 percent over the weekend, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up.”
In what seems like a rarity these days, Bloomberg is running something bearish as their #1 US “Economy” story today (mid-terms are over). But is it true? How can it be? I thought the all-time high in cost of living in America for 2014 was going to vanish instantaneously?
What if it doesn’t?
And what happens when the nasty side of commodity #deflation results in ramping job losses in two of the best hiring States in the last year (Texas and North Dakota). Is that why US jobless claims have been accelerating for 3 straight weeks alongside crashing oil?
Or is that why the Russell #Bubble (Russell 2000) has been literally FLAT, for 4 consecutive weeks? Pardon? I thought Bloomberg/CNBC was saying “stocks are up, everything is fine”? Here are the last 4 weekly closing prints for the Russell:
Big time bull market there, for the “folks.”
We’re going to have to see some bigger time reversals in both jobless claims and consumer spending in the next 4 weeks to reverse what bond yields (10yr crashing -28% YTD to 2.16%) have been to Russell “growth” investors all year long – their storytelling nemesis.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.16-2.28%
WTI Oil 63.86-71.12
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer