This note was originally published at 8am on December 08, 2014 for Hedgeye subscribers.
“I’m the fellow who takes away the punch bowl just when the party is getting good.”
-William McChesney Martin
Economic #history fans will remember McChesney Martin as the Chairman of the Federal Reserve when central planners didn’t decide the fate of every market day (1951-1970). Sadly, Richard Nixon and Arthur Burns changed that by Burning The Buck in 1971.
Today, if you want to light up your country’s currency and party hard, you need a Ph.D. in economic storytelling. Devaluation has plenty of stock market pop, but “the trouble is...” according to Ken Rogoff, “a lot of people have not had any punch yet.”
In contrast, the two aforementioned quotes are what Jim Rickards used to introduce Chapter 10 (pg 243 in The Death of Money) – “Crossroads.” And, oh are we at a crossroad for both growth and inflation expectations, globally, this morning.
Back to the Global Macro Grind…
Before I replay what happened last week, here’s what the Japanese just restated (revised lower) about the results of burning their currency – Q3 GDP dropped -1.9% (year-over-year) in 2014. “So”, they definitely need to triple down on that!
I know, that is so Q3. How about China’s November trade data? Imports dropped -7% year-over-year (from +5% in October, which was a bad number to begin with); exports slowed to +5% NOV vs. +12% in OCT. #TrainWreck = Chinese stocks straight up.
In other central planning news, here’s what the world’s Big 3 (currencies) did last week:
- Japanese Yens burned another -2.3% last week and have lost -15.6% of their value in the last 6 months
- Europe crashed the Euro another -1.3% wk-over-wk (-10.1% in the last 6 months)
- US Dollar Index rose another +1.1% on the week (+11.2% in the last 6 months)
With the exception of a counter-TREND move in US jobs data (the 1st pseudo good rate of change report in months), most of the strength in the US Dollar can be attributed to the currency war (i.e. where the BOJ and ECB burn theirs).
To review, why does an un-elected central planner burn the currency?
A) In response to #GrowthSlowing and/or
B) In reaction to #deflation
In Hedgeye-speak (i.e. in Bayesian rate of change terms), when both of these core factors (GROWTH and INFLATION) are slowing, we call that the 4th Quadrant. That’s why our Q4 Macro Theme is called #Quad4 Deflation. That’s where we think the USA is too.
But, but… “it’s different this time” (says the cover of Barron’s, who will be charging 2 & 20 for that investment thesis starting in 2015 due to #deflationary forces in Old Wall media print advertising).
And… at the end of a cycle (66 consecutive months of US economic expansion), the other 2/3 of Americans who have only been punched (negative real wages for the last 5 years) are going to magically get wage growth and a capex cycle…
Simple Global Macro risk manager question: with global #GrowthSlowing and #Quad4 Deflation, how are global capex cycles and wages going to inflate? A: I don’t know.
While the fanfare surrounding Nikkei and “Dow 18,000 Bro” has been fantastic, the following stock markets have not been:
- Emerging Markets (MSCI Equity Index) down -1.8% on the week to -1.6% YTD
- Latin American Equities (MSCI Index) down another -5.1% week-over-week to -10.8% YTD
- Asia ex-Japan (MSCI Index) down -0.9% on the week to +3.7% YTD
- Brazil’s stock market -5.0% on the week to +0.9% YTD
- Canada’s stock market down -1.8% week-over-week (+6.3% YTD)
- Russia’s stock market continued to crash, -6.7% last week to -37% YTD
These stock markets have been undergoing what we call a phase transition in inflation expectations becoming deflationary ones. You can see that in the following real-time read-throughs:
- US 5yr Breakevens dropped another -4 basis pts on the wk to 1.36% (crashing -26%, or -47bps, YTD)
- West Texas Crude Oil down another -0.8% to -28.6% YTD
- CRB Commodities Index deflating another -0.8% last week to -9.9% YTD
Even the strongest commodities in 2014 (Coffee and Cattle) were down -3.9% and -2.6% last week, respectively.
From here, I think the debate really boils down to what’s more important: A) the impact of #deflation on stocks, bonds, and workers who have been compensated (in size) by the last 5 years of inflation expectations, or B) Ph.D. hopes for US wage growth?
Rather than partying hard with the planners, I’ll take B). Yep, call me names – I’m the fellow who doesn’t get paid to navel gaze at the Weimar Nikkei Dow and think that 55x earnings for the Russell 2000 in 2014 wasn’t a #bubble.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.16-2.34%
WTI Oil 62.21-69.40
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer