THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- Health Care Select Sector SPDR Fund (XLV)
- Consumer Staples Select Sector SPDR Fund (XLP)
- iShares National AMT-Free Muni Bond ETF (MUB)
- Vanguard Extended Duration Treasury ETF (EDV)
- iShares 20+ Year Treasury Bond ETF (TLT)
Short Ideas/Underweight Recommendations
- iShares Russell 2000 ETF (IWM)
- SPDR S&P Regional Banking ETF (KRE)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
- iShares MSCI European Monetary Union ETF (EZU)
- iShares MSCI France ETF (EWQ)
QUANT SIGNALS & RESEARCH CONTEXT
What Will the Big Macro Surprises Be in 2015?: In our 12/31 Early Look note, which was penned by my colleague Daryl Jones, we discussed how investors tend to overweight the recent past in their predictions of outcomes over longer durations. We’re all guilty of it and, quite frankly, it would be nearly impossible not to based on how our brains are wired to interpret and analyze signals, according to Dr. Daniel Kahneman, the world’s foremost authority on behavioral heuristics.
So what does Bloomberg consensus think will happen in 2015?
Looking to the U.S. economy:
- GROWTH: real GDP growth will accelerate to +3% from an estimated +2.3% in 2014
- INFLATION: headline CPI will decelerate to +1.5% from an estimated +1.7% in 2014
- POLICY: the target Fed Funds Rate will back up to ~1% by EOY ’15 from 0-0.25% currently; the federal budget deficit will narrow further to 2.6% of GDP from an estimated 2.9% in 2014
- CURRENCY: the U.S. Dollar Index will end the year at 92.42 from 90.99 currently
- RATES: the 10Y U.S. Treasury yield will the year at 3.06% from 2.12% currently
Looking to the global economy:
- GROWTH: world real GDP growth will accelerate to +2.8% from an estimated +2.4% in 2014
- INFLATION: world headline CPI will decelerate to +2.4% from an estimated +2.3% in 2014
- POLICY: the aggregated global sovereign budget deficit will narrow slightly to 2.6% of GDP from an estimated 2.7% in 2014
Looking to the Eurozone economy:
- GROWTH: real GDP growth will accelerate to +1.1% from an estimated +0.8% in 2014
- INFLATION: headline CPI will accelerate to +0.6% from an estimated +0.5% in 2014
- POLICY: the ECB’s benchmark interest rate will remain on hold and the aggregated sovereign budget deficit will narrow slightly to 2.4% of GDP from an estimated 2.6% in 2014
- CURRENCY: the Euro will end the year at 1.18 per USD from 1.20 currently
- RATES: the 10Y German bund yield will end the year at 1.09% from 0.50% currently
Looking to the Japanese economy:
- GROWTH: real GDP growth will accelerate to +1% from an estimated +0.3% in 2014
- INFLATION: headline CPI will decelerate to +1.5% from an estimated +2.8% in 2014
- POLICY: the BoJ’s benchmark interest rate will remain on hold and the federal budget deficit will narrow materially to 6.8% of GDP from an estimated 8.3% in 2014
- CURRENCY: the Japanese yen will end the year at 125 per USD from 120.21 currently
- RATES: the 10Y JGB yield will end the year at 0.55% from 0.33% currently
Looking to the Chinese economy:
- GROWTH: real GDP growth will decelerate to +7% from an estimated +7.4% in 2014
- INFLATION: headline CPI will decelerate to +2% from an estimated +2.1% in 2014
- POLICY: the PBoC will lower its benchmark 1Y lending rate to 5.2% from 5.6% currently and the central government budget deficit will widen to 2.4% of GDP from an estimated 2.1% in 2014
- CURRENCY: the Chinese yuan will end the year at 6.09 per USD from 6.21 currently
- RATES: the 10Y MoF yield will end the year at 3.61% from 3.65% currently
Key takeaways from current sell-side consensus:
- Consensus is forecasting yet another year of “escape velocity” growth expectations for the U.S. economy, which will prompt the Fed to finally begin hiking interest rates.
- The Eurozone economy will fare marginally better than last year.
- The Japanese economy will fare meaningfully better than last year, prompting/perpetuating fiscal tightening.
- The Chinese economy will fare meaningfully worse than last year, prompting continued easing out of the PBoC and State Council.
- Interest rates will back up materially across the developed world.
- The U.S. dollar will end the year marginally higher vs. the EUR and JPY.
We don’t do wire-to-wire annual predictions, but here’s how we currently stand with respect to the aforementioned takeaways (we can and will change our minds throughout the year, as we did nailing the move from #InflationAccelerating in 1H15 to #Quad4 deflation in 2H15):
- We disagree, sort of. While the U.S. consumer will certainly benefit from #Quad4 deflation over the intermediate-term, we think the U.S. economy is clearly in the latter stages of the business cycle, so projecting any strength beyond 2015 VERY dangerous. The Fed probably stays in “wait-and-see mode” throughout the year. The Fed is likely to appear hawkish alluding to economic growth and the labor market in official FOMC statements and dovish alluding to disinflation in the commentary of regional Fed presidents.
- We disagree. ECB QE is a inevitable as it is contentious among European bureaucrats.
- We disagree. Bring on QQE expansion and continued fiscal easing in Japan.
- We agree wholeheartedly and see material risk of another bubble in the A-Shares.
- We disagree wholeheartedly, as long-term Treasury bonds remain one of our top macro bets.
- Consensus is not Bullish Enough on the U.S. dollar, as we believe a material move higher is an increasingly probable outcome.
Obviously the sell-side forms only one part of the Consensus Macro equation. Consensus on the buy-side, which, as an industry, is becoming increasingly less differentiated from a positioning perspective, can be roughly tracked via the speculative net length of futures and options contracts, which is reported weekly by the CFTC.
A positive reading indicates a net LONG position, while a negative reading indicates a net SHORT position. Perhaps more important than the absolute positioning is how the position is tracking over time, as such deltas can indicate the presence of marginal investors crowding into or blowing out of positions. To that tune, the following chart shows the net length of 20 key macro markets, ranking them according to their TTM Z-Scores:
Key takeaways from current buy-side consensus:
- The buy-side is heavily net SHORT of long-term Treasuries.
- The Mexican peso is nearing oversold territory.
- Large-cap U.S. equities are nearing overbought territory.
- Recent strength in the USD and Japanese equities should continue over the immediate-term, as neither the yen nor euro are particularly crowded from a net SHORT perspective.
From a process perspective, it’s worth noting that we typically begin to fade the Consensus Macro lean whenever a particular index or market’s speculative net length reaches +/- 2 SIGMA. That’s not to say we will automatically adopt a variant view with respect to the intermediate-to-long term, but the immediate-term counter-trend reversals tend to be epic when the market is leaning too heavily in one direction or the other. Fading Beta in our Real-Time Alerts product is one of the things we do best @Hedgeye.
All told, we hope this snapshot of consensus is helpful in formulating your opinions on where the best places to source your non-consensus macro bets are in 2015. Consensus is right more often than any of us are paid to admit, but we all know the big money is typically made on the other side of the trade.
From the only macro team whose non-consensus forecasts got the direction of interest rates right in both 2013 and 2014, best of luck to you in 2015!
***CLICK HERE to download the full TACRM presentation.***
TRACKING OUR ACTIVE MACRO THEMES
#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.
#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.
Moscow, We Have a Problem (12/16)
#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.
Best of luck out there,
Associate: Macro Team
About the Hedgeye Macro Playbook
The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.