This note was originally published at 8am on December 16, 2014 for Hedgeye subscribers.
“The Revolution transformed science from a popular hobby into a full-fledged profession.”
-Sharon Bertsch McGrayne
While December 16th was one of the beauty days of the American Revolution (the Sons of Liberty dumped loads of tea in the Boston Harbor #TeaParty), that is not the revolution the aforementioned quote is alluding to…
Believe it or not, there was a time when the French were hard core evolutionists in math, science, and innovation too.”For almost 50 years (from the 1780s until Pierre Simon Laplace’s death in 1827), France led world science as no other country has before or since.”
-The Theory That Would Not Die (pg 30)
Today, Canadians and Americans (sorry, had to include the homeland) have a once in a lifetime opportunity to revolt and redo the entire profession of mainstream economic and market analysis. During the 18th century American and French Revolutions, they needed a crisis to change. Sadly, I don’t think the change I’m envisioning will be born out of something that’s different this time.
Back to the Global Macro Grind…
While I realize there is tremendous value in fading the forecasts of the #OldWall (and that we should probably pay to keep them in business for that reason alone!), eventually redoing all of this means we must move forward and evolve.
Moving forward starts with understanding where we came from. So let’s do that and look at the almighty US growth and inflation “2014 Forecasts” (summarized in bond yield terms) from Barron’s on what was going to happen this year:
- Bank of America (Savita Subramanian) 10yr Yield forecast = 3.75%
- Tom Lee (formerly JP Morgan) 10yr Yield forecast = 3.65%
- Barclays (Barry Knapp) 10yr Yield forecast = 3.50%
- Morgan Stanley (Adam Parker) 10yr Yield forecast = 3.45%
- Citigroup (Tobias Levkovich) 10yr Yield forecast = 3.25%
With the 10yr US Treasury Yield crashing to 2.09% today (-31% YTD), my congratulations goes out to the fine folks at Citigroup for being closest to the pin. If you had client moneys in that strategy, you’d be short the Long Bond (and long the Russell, which is -2.1% YTD).
Looking forward at Barron’s “2015 Outlook” for growth and inflation expectations (yes, they do manifest in the bond market):
- Tobias @Citigroup inched his forecast down to 2.95%
- Parker @MorganStanley opted for 2.85%
- And Savita @BofA went all-bearish on bond yields at 2.75%!
I couldn’t make this up if I tried.
And on the why, don’t ask me, because I genuinely do not understand A) the process that got them to 3.25-3.75% in 2014 to begin with and/or B) the risk management components of the 2.75-2.95% forecast cuts, when they should be 100 basis points lower than that.
Both Barron’s and Bloomberg Magazine recently ran “This Time It’s Different” on their covers (Barron’s did on the weekend before their almighty god Dow dropped over 700 points). But, for the life of me, I can’t find an 2014 Outlook that read something like this:
- Worldwide growth will start to slow in the back half of 2014
- In response to #GrowthSlowing Europe, Japan, and China will all panic and print
- After seeing late cycle inflation peak in 1H14, #deflation will take hold by Q4
- Oil will start to crash…
- Then Russia will crash…
- As Energy stocks crash
- And the High Yield debt markets will start to shake…
- As Emerging markets will continue to crash
I’ll stop there…
Q: Who nailed all of that? A: Not Ed & Nancy.
The only thing that is different this time are the names of the macro “forecasters” on the sell-side who are willing to subject themselves to my #timestamping. With Tom Lee out, JP Morgan has enlisted some dude named Dubravko.
“So”, excited to hear of new competition, I looked Dubravko up hoping to find some innovation in his process. Unfortunately, while his resume says he has some experience as a “Quantitative Researcher”, his 2015 “forecast” looks very #OldWall to me:
- US GDP Growth = 3.0%
- UST 10yr Yield = 2.80%
- SP500 “target” = 2250
Nice round numbers that ultimately imply:
A) US growth to “de-couple” from global #GrowthSlowing and accelerate year-over-year
B) US Bond Yields and Growth Equity returns to rise in response to that
I wish you luck, Dubravko. And thank you for being part of a Consensus Macro that we will continue to fade with a revolutionary process and risk managed outlook.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.09-2.21%
WTI Oil 53.27-61.15
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer