This note was originally published
at 8am on December 11, 2014 for Hedgeye subscribers.
“Each time the system is recalculated, the posterior becomes the prior.”
-Sharon Bertsch McGrayne
Simple is as simple does, within a non-linear and dynamic system like the Global Macro market, that is…
“Conceptually, Bayes’ system was simple. We modify our opinions with objective information. Initial Beliefs (our guess where the cue ball landed) + Recent Objective Data (most recent ball left or right of the prior) = A New and Improved Belief.”
-The Theory That Would Not Die, pg 8
What do you believe? Is what you believed in late September consistent with what you believe after the October and December corrections? How about from January to June (when late-cycle inflation was accelerating) vs. today’s global #deflation? The best way to manage risk is by constantly recalculating your system.
Back to the Global Macro Grind…
What does the system say this morning?
With the Russell 2000 down YTD and both inflation expectations and 10yr bond yields #crashing, initial 2014 consensus beliefs of worldwide growth accelerating and rates rising are no longer believed.
Since so many Old Wall dudes still use the “Dow” as some sort of proxy for the global economy, here’s what the broader global equity system is saying:
1. Weimar Nikkei (Japan) only goes up when the economy is so bad that they need to hit the CTRL+Panic (print) button
2. The liquid side of the “China” trade (Hang Seng) continued to signal bearish TREND @Hedgeye overnight (-0.9%)
3. The former Global Growth “signal” (known as Dr. KOSPI in South Korea) -1.5% overnight to -4.7% YTD #bearish
4. The UK’s FTSE failed @Hedgeye TREND resistance and is back to DOWN for 2014 YTD
5. Germany’s DAX is holding on to TREND support of 9688 at +3.2% YTD
6. Greece, Portugal, and Russia continue to crash (down more than 20% respectively, YTD)
Oh, and Argentina dropped -14% in the last 2 trading days… but #NoWorries there – centrally planned currency devaluation has had fantastic economic results for the Argentines! Watch the LEGO movie this weekend with your kids – “everything is awesome.”
Yep, everything other than this other Big Macro thing that is correlating with #CommoditiesCrashing called 10yr Bond Yields:
1. Japan 10yr = 0.40%
2. Germany = 0.67%
3. France = 0.94%
“So” I guess my growth-and-inflation-slowing bull case for the USA Long Bond (TLT) with the US 10yr Treasury Yield crashing (-28% YTD) to 2.16% has plenty of room to run.
The only thing that is awesome (i.e. you don’t have to make things up about global growth accelerating and #deflation not being a globally interconnected risk) is actually being long something, in size, with very low-volatility (Long-Term Treasuries).
One of our hard core customers called it “TLT tizzling” at our Hedgeye NYC Holiday Party on Tuesday… so I looked that up in the Urban Dictionary: “A fat party. This word is derived from the word partizzle, shortened to tizzle…”
Yes, it’s ok to laugh at this game. If you don’t, it might just make you cry. And so will what’s most causal to the pain you are seeing in inflation expectations globally right now – central planners losing Mr. Macro Market’s confidence that they can re-flate asset prices.
In case you didn’t know, that’s how this central planning game of expectations ends – in #deflation.
It’s one thing to run around telling yourself that the Dow and DAX are up because you just knew that markets can’t go down. It’s entirely another to be doing that over and over again when the global macro system starts to signal that the party’s music is stopping.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets, which you can find in our Daily Trading Range product) are as follows:
UST 10yr Yield 2.14-2.24% (bearish)
SPX 2018-2042 (bullish)
RUT 1151-1172 (bearish)
KOSPI 1901-1965 (bearish)
VIX 14.43-19.59 (bullish)
USD 87.67-88.79 (bullish)
EUR/USD 1.22-1.25 (bearish)
Yen 116.79-121.65 (bearish)
Oil (WTI) 60.48-65.38 (bearish)
NatGas 3.49-3.81 (bearish)
Gold 1205-1242 (neutral)
Copper 2.84-2.95 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer