This note was originally published
at 8am on January 05, 2015 for Hedgeye subscribers.
“Ye shall know them by their posteriors.”
-The Theory That Would Not Die
For those of you who know me well, I’m not getting any younger today. And for those of you who will play men’s league hockey against me on Thursday night, you’ll note that my posterior continues to slow too.
What’s fascinating about language is that things like words can mean very different things. A “posterior” can be “A) a person’s buttocks, B) further back in position, or C) coming after in time as in subsequent to, or following”… (Wikipedia)
In Bayesian stats (probability-speak), there’s the “prior” and the “posterior.” In our profession, everyone has a prior (subjective forecast of the future), but few have accurate macro posteriors. That’s mainly because consensus tends to chase their behind.
Back to the Global Macro Grind…
Rutgers professor Glenn Shafer says that “much that has been written about the history of probability has been distorted by the English-centric point of view” (The Theory That Would Not Die, pg 129). Since most things have a bias, it’s hard to disagree with that.
It’s even harder to disagree that both #OldWall Street and the financial media that panders to its posteriors don’t have a perma-growth and inflation point of view. After all, central planning Policies To Inflate should give us asset price inflation, forever, right?
Not so much. In rate of change terms, market expectations both inflate and deflate. That is #history. And whoever wants to suggest “it’s different this time” can do so at the risk of other people’s moneys…
In what was supposed to be a “quiet week” to end 2014, the posterior of #deflation continued to manifest across Global Macro:
- US Dollar was up another +1.2% week-over-week as the Euro was burned -1.5% by more Draghi QE jawboning
- CRB Commodities Index (19 Commodities) didn’t enjoy that, closing the yr on its lows, and -2.7% wk-over-wk
- Oil (WTI) dropped for the 6th straight week, -3.9% wk-over-wk, crashing to $52.61/barrel
- Russian and Greek stocks led Global Equity #deflation, down -4.6% and -2% wk-over-wk (vs. SP500 -1.5%)
- Oh, and the former inflation expectations #Bubble known as Bitcoin, ended the yr on its lows, < 278
Germany’s 5yr Breakeven rate dropped -14 basis points last week to, get this, -0.07%. To put that in context, Japanese and American 5yr Breakevens are +0.35% and +1.24%. That’s just a flat out nasty #deflation signal to the world. Respect it.
All the while, the perma-bulls on US economic growth still think that the prior Q3 US GDP is going to provide for a posterior of USA “de-coupling” from global #GrowthSlowing + #Deflation risk…
*(i.e. the same risks that unglued US Commodity, Energy, and Junk Bond investors for the last 3-6 months)
The only problem with that “US is a closed economy” bull case for US economic growth is the current data. In rate of change terms, the data for December slowed versus both November and the Q314 data that growth bulls are anchoring on:
- ISM (USA) for DEC slowed from 58.7 NOV to 55.5
- PMI (Markit) for DEC slowed from 54.8 NOV to 53.9
The reason why our posteriors focus on rate of change is quite simply because the #history of market prices do. When growth and inflation are slowing, at the same time, 10yr US Treasury Yields fall and the Long Bond rises. On DEC data, that’s what happened last wk:
- US 10 yr Treasury Yield dropped a big -14 basis points wk-over-wk to 2.11%
- US Yield Spread (10yr minus 2yr) compressed another 6 basis points on the wk to 145bps
Yet Consensus Macro (net long/short positioning in CFTC non-commercial futures/options contracts) stayed with:
- LONG US Equity Beta (SP500 Index + Emini) net LONG position of +108,167 contracts (vs. 3mth avg of +28,575)
- SHORT US Treasuries (10yr) with a massive net SHORT position of -277,477 contracts (vs. 3mth avg of -121,963)
In other words, since consensus has a posterior of the prior (consensus thinks US growth is as good as it was in Q3), they think stocks get “multiple expansion” (from 19x ttm SP500 and 55x Russell) alongside rising bond yields and rate hikes.
I still think the Best Macro Idea (low-volatility, higher relative return) in positioning for our non-consensus posterior of global #GrowthSlowing + #Deflation is long the Long Bond (TLT).
That’s not to say I won’t cover my posterior (best short ideas) on pullbacks like we had last week, and signal buy in our best US domestic consumption long ideas (RH, HOLX, WWAV, etc.). In Real-Time Alerts, ye shall know my positioning by my #timestamps!
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.09-2.20%
Oil (WTI) 51.76-55.12
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer