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Climbing The Wall

“We were just us up there – 19 days on the wall.”

-Kevin Jorgeson

In case you missed it, two American free-climbers achieved greatness this week. After a 19-day epic #grind of human preparation, teamwork, and perseverance, Tommy Caldwell and Kevin Jorgeson successfully scaled Yosemite’s El Capitan.

Since you know I like to think and write in metaphors of historical feats and failures, there are obviously a lot of ways I can roll with this story. But the most important lesson is to have both patience and #process.

These guys spent 7 years planning to embrace the uncertainty of the climb… and 7 full days, literally stuck, hanging, on the most difficult face of mountain (Dawn Wall). If you think multi-duration and multi-factor like these guys do, you can achieve excellence too.

Climbing The Wall - 99

Back to the Global Macro Grind

I’m not a fan of excuse making or mediocrity. I know that might rub some people the wrong way but, in case you didn’t notice, I don’t particularly care about what they think. My teammates and I are out here, every day, climbing an Old Wall that we know we can beat.

Does that mean that this is easy? Of course not. This is one of the highest paying professions on the planet because excellence isn’t allocated to job titles and/or academic standing – it’s earned out there on The Wall, every day.

The toughest climb we’ve had in the last 3 years hasn’t been making the bullish Long Bond (TLT) call. It was in building a #process (for 7yrs as a team) that was flexible and could objectively go both ways, calling for:

  1. A breakout in US interest rates in 2013 (as real US economic and employment growth #accelerated)
  2. Then the reversal of rates in 2014 (global #GrowthSlowing + #Deflation)

I don’t know if it was the 7 days at the end of September (before the Russell’s JUL-OCT drawdown capitulated at -15%) or the last 7 trading days of December when everything was going the wrong way vs. our plan…

But there were plenty of times where I questioned my every premise. I had to review everything I’d written in my notebooks, my teammates models, etc. and ask myself, over and over again, whether or not this was the right path to take.

Fortunately, it was.

This morning both the inability of central planners to arrest gravity (global #GrowthSlowing) and market expectations for #deflation are reaching an immediate-term capitulation point.

No, that’s not just staring at the “Dow 18,000 Bro” futures guys – remember, we do Global Macro – and there’s a lot more to beating this Old Wall than calling out the 50-day in spooz.

Today is capitulation day for Long Bond bears. If they didn’t get rates right, they’re going to be feeling plenty of pain in those asset allocations that are directly correlating to crashing bond yields. Their pain is your gain.

Follow #Deflation’s Dominoes:

  1. UST 10yr Yield = 1.71% (already down 21% YTD, and -43% since this time last yr)
  2. Commodities (CRB Index) = 220 (that’s -29% since June of 2014, at 12 month #deflationary lows)
  3. Financials (XLF) and Regional Bank Stocks (KRE) are already -6.2% and -10.2% YTD, respectively

Particularly on that last point (which is just equities following what bonds and commodities already did), that’s a nasty start to the year. And it fundamentally should be, because:

  1. Crashing Bond Yields (and widening credit spreads) are clean cut #GrowthSlowing and #Deflation signals
  2. Yield Spread Compression (10yr minus 2yr at a fresh 12 month low of 128 bps today) = #GrowthSlowing
  3. And when 1 and 2 are true, you don’t buy late-cycle stocks like Energy, Financials, and Industrials

If all you do is US stocks (we don’t), here’s the YTD score:

  1. Energy (XLE) -8.0% YTD
  2. Financials (XLF) -6.2% YTD
  3. Industrials (XLI) -3.9% YTD

Vs. the #alpha climbers:

  1. Utilities (XLU) = +2.1% YTD
  2. Healthcare (XLV) = +1.0% YTD
  3. Consumer Staples (XLP) = +0.8%

In other words, if you are out-front, beating your competition on that absolute and relative performance wall, you are A) short/underweight what we don’t like and B) long what we like.

What’s next for bond yields, the late-cycle bank stocks, etc?

  1. What if jobless claims (Energy States) breakout to the upside (see Chart of The Day)
  2. What if #Deflation hurts sales, earnings, and margins? (SP500 is coming off peak)
  3. What if European stocks react to Draghi’s plan next wk like Swiss stocks just did?

What if you woke up, every day, asking yourself not whether or not you like me as a person… but asking yourself about yourself, your process, and your performance path?

This isn’t Yosemite. This is Wall Street. And yes, you need to have a macro view. So #Timestamp it! The plan is always that the plan is going to change. And while you might lose a few fingernails, stressing yourself to not take the consensus route along the way…

If you can make that epic performance climb, you can sit up there at the top, smiling all day.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.70-1.93%

SPX 1

VIX 19.78-23.31

Oil (WTI) 44.43-47.93
Gold 1

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Climbing The Wall - Claims vs Crudel