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Consensus Macro Memes

This note was originally published at 8am on January 07, 2015 for Hedgeye subscribers.

“Memes propagate themselves in the meme pool.”

-Richard Dawkins

 

Born in Nairobi, Kenya, 73 year old Richard Dawkins is a well known evolutionary biologist who wrote The Selfish Gene in 1976. He developed a gene-centered view of evolution and has plenty of interesting writings on one of my main market focuses, #behavior.

 

“Examples of memes are tunes, ideas, catch phrases, clothes, fashions … leaping from brain to brain via a process, in the broad sense, can be called imitation.” –Dawkins (The Medici Effect, pg 17)

 

Do Global Macro Themes propagate themselves into consensus narratives? You bet your Madoff they do. But timing them matters. You really get paid by front-running them by 3-6 months. “So” (good #OldWall meme word right now), let’s keep trying to do that.

 

Consensus Macro Memes - 1.7 book

 

Back to the Global Macro Grind

 

For anyone with an objective (Bayesian) research process of analyzing the prior in order to probability weight the next posterior, the fundamental trends of global #GrowthSlowing and #Deflation have been plainly obvious for the last 3-6 months.

 

To be fair, you didn’t have to call the top in big things like long-term bond yields (12 months ago) or other major macro things like Oil, the Euro, and the CRB Commodities Index (6 months ago) to protect your client moneys against these major macro risks.

 

In the last 3 months however, you’ve had multiple opportunities to sell your Emerging Markets, High Yield/Junk Bonds, Energy stocks, etc. – even in the major US equity meme chasing indices, you had fantastic selling opportunities at the:

 

  1. Late SEP top
  2. Late NOV top
  3. Late DEC top

 

As always, market performance propagates consensus macro memes, so I highly doubt you get another lay-up JAN high to sell into like you had in SEP, NOV, and DEC… but doubt is where the short-squeezes are born, “so” I try to never say never!

 

At 1.94% on the US 10yr Treasury Yield this morning, most American mainstream financial “news” memes are picking up on the simple reality that the US A) is not a “closed” economy B) US economic data slowed in December and C) #deflation is a risk to the jobs market.

 

Amidst the epic storytelling of why the “market was up” on December 29th, there’s one big thing the perma-growth and inflation bulls have left - the ongoing “booming 5% economy with wage growth and capex cycles” meme that is about to appear like a castle in the air…

 

“So” what if the data goes something like this for the next month instead?

 

  1. US Jobless Claims Rise (think Texas, the Dakotas, etc)
  2. Late-cycle indicators (like inflation and employment) both slow, at the same time
  3. Q414 GDP slows to 2% (or less)

 

Since the politicized, and to some extent ignorant, description of US GDP Growth is a sequential (not an annualized, year-over-year rate of change) number, that doesn’t mean that come February that headline-meme-news won’t be that US GDP in 2014 was actually closer to 2% year-over-year than 3, 4 or 5%.

 

Then the Consensus Macro Meme might just get why a 10yr bond yield of around 2% reflects an economy whose rate of year-over-year change was tracking in line with 2% (or lower). If real year-over-year GDP was accelerating > 3%, I think the 10yr yield would too (that was our call in 2013 though, when we wanted you to buy every dip in US stocks and short the Long bond, TLT).

 

Front-running predictable #behavior in both mainstream newsflow and macro market reactions by central planners is not easy, but we have proven that it is doable. Humor me for another minute and tell me what the US Federal Reserve does if the following three face cards show up in the flop:

 

  1. #Deflation (as in collapsing oil, commodities, breakevens, headline CPI, etc.)
  2. Slowing monthly (December and January data) and slowing Q414 GDP
  3. Rising jobless claims and risks to the labor market

 

Alex, I’ll take “what is pushing out the dots?” on a June rate hike for my entire asset allocation. And the 10yr yield goes lower on that. TLT Tizzle. Yep.

 

I’ll outline our scenario analysis on our Q1 Macro Themes Conference Call tomorrow (ping sales@hedgeye.com if you’d like access). Probability weighing phase transitions in macro consensus memes – that’s my job. That’s also risk management.

 

Our immediate-term Global Macro Risk Ranges (I publish 12 of these with our intermediate-term TREND view in our Daily Trading Range product) are now:

 

UST 10yr Yield 1.87-2.14%

SPX 1983-2046

VIX 16.99-21.96

EUR/USD 1.18-1.20

YEN 118.26-121.01

Oil (WTI) 45.42-53.22

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Consensus Macro Memes - 01.07.15 chart


More Cowbell! A Roadmap Ahead of the ECB’s Thursday Meeting

Position: Short EUR/USD (etf FXE); Short France (EWQ)


All eyes are on Thursday’s ECB press conference at 8:30am EST – ECB President Mario Draghi has all but officially told the world that he’ll issue sovereign QE.  Below, we present a brief case for being short the EUR/USD, with no crystal ball to guide us on timing, sizing, or composition of a QE package.  

 

Shorting The EUR/USD:  Head’s You Win; Tail’s You Win


Summary:  We see Draghi coming up short in his pursuit to wave the QE wand and inflect the Eurozone’s rising tide of #deflation.   Our view has not diverged over past years:  Draghi remains in a box as he doesn’t have unified support from his country level lieutenants to carry out the necessary (remaining) “structural reforms,” and a sole inflation target to govern highly diverse economies is misplaced. Here’s our scenario analysis heading into Thursday:

 

1)      Should Draghi deliver (and/or under-deliver) on current  QE market expectations of €500 Billion (which themselves are highly speculative), we believe the EUR/USD is set to burn lower at least until he can better “fulfill” newly set expectations.

2)       Should Draghi over-deliver on QE, we expect the EUR/USD to burn on the back of an expanded balance sheet and against an environment of strong USD and weak oil.  Grounding our call remains the fundamentals of #EuropeSlowing.

3)      Should Draghi not deliver QE on Thursday, expect the EUR/USD to remain weak as deflation and abysmal growth prospects remain center stage for the region.

More Cowbell!  A Roadmap Ahead of the ECB’s Thursday Meeting - Draghi cartoon 01.20.2015

 

The EUR/USD remains broken across our TRADE, TREND, and TAIL durations.

More Cowbell!  A Roadmap Ahead of the ECB’s Thursday Meeting - zzzz. eurusd

 

Timing – Central Bank Hints:   A week ago, Draghi told the German publication Die Zeit that the ECB is ready to buy government bonds on Thursday in order to fulfill its mandate on price stability. Can we believe him?

  • The Swiss National Bank (SNB) thought so. In an emergency decision last Thursday morning (1/15) ahead of its expectation for the ECB to launch QE (which would weaken the EUR and encourage piling-in to the safe Swissy safe haven trade) it discontinued its 3 year running policy of a minimum exchange rate at 1.20 vs EUR and cut its main interest by 50 bps to -0.75%
  • The Danish Central Bank thought so. To limit currency appreciation, the Danish central bank over the weekend cuts its deposit rate to -0.2% from -0.05%
  • ECB.  Since its December meeting, Draghi has talked of a QE announcement falling in Q1 2015. While there’s been strong pushback, especially from the German camp against QE, since the New Year, Draghi’s public remarks on QE have not wavered and in fact increasingly suggest announcement at the 1/22 meeting

 

Timing – Economic Hints!

  • Under Draghi’s QE logic to ignite inflation, there’s no sense in delaying QE as the ECB is well off its mandate of price stability based on CPI at or near 2.0%
  • CPI is currently at -0.2% and has tracked lower for 3+ years (see chart)

More Cowbell!  A Roadmap Ahead of the ECB’s Thursday Meeting - zzzz. draghi cpi

 

Timing – Legality Roadblock Passed?

  • As an initial indicator for the legality around the ECB issuing QE, The European Court of Justice Advocate General said last Wednesday that the ECB’s bond-buying scheme – the Outright Monetary Transactions (OMT) Program – is “compatible in principle” with EU law.
  • While not a Final decision of the ECJ, and only a proxy for a pending round of QE, this decision appears to be a key “tell” that will positively influence Draghi’s decision making on QE
  • We expect the Germans in particular to cry a loud foul unless the terms and conditions of the QE meet their needs

 

Size – A Game of Expectations!

  • The market got a hold of an ECB draft proposal for a €500 Billion QE package. 
  • Since last year, Draghi has indicated the willingness of the ECB to tack on another €1Trillion to its balance sheet. 
  • What’s the magic number?  We don’t purport there to be one as we have little conviction that “this time around” Central Bankers can fix deep seated economic competitive issues with magical financial-based incentives.

 

Composition – Getting Ducks in Order: 

  • We suspect Draghi and ECB may well be waiting to get past the Greek election on January 25thuntil it decides on adjusting the composition of QE
    • Therefore the “details” may not come until March 5th when the ECB convenes its next press conference
    • Currently, the Greek anti-austerity party Syriza maintains a 4% to 6.5% advantage in three polls ahead of PM Samaras’ New Democracy government.

 

Composition – The Devil is in the Details:

  • Some big unanswered questions remain:
    • Will QE involve risk sharing among the National Central Banks, mandating them to buy up their own countries’ bonds?
    • Will the ECB take on the full risk/exposure in buying sovereign bonds?
    • Or will there be some mix between the two?
    • Also, will ECB purchases be excluded to only AAA rated paper?
  • The Germans remain the loudest cohort that still stands against QE and therefore is most interested in National Central Banks sharing risk in any QE program
  • As it relates to Greece, based on the election outcome, the ECB may have to alter its QE program. A couple examples:
    • Should Syriza win, the ECB may exclude Greek bonds from its purchasing program for fear the country may try to restructure the bonds after the ECB has purchased them.
    • Should Syriza win, it may influence the ECB to put more emphasis on the National Central Banks to fulfill QE purchases. This too would appease the Germans.

 

The days ahead could bring some monster swings across global markets. We’re positioned to stay short the EUR/USD, and today added a perennial country favorite to the short side, France via the etf EWQ.  We’ll be along for the ride. 

 

Matthew Hedrick

Associate


Cartoon of the Day: To QE or Not QE (That Is the Question)

Cartoon of the Day: To QE or Not QE (That Is the Question) - Draghi cartoon 01.20.2015

Will ECB President Mario Draghi deliver the central planning drugs as the currency bloc teeters on the brink of a deflationary spiral?


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McCullough: Gold Showing A "Clean-Cut Buy Signal" | $GLD

 

During the Q&A portion from today's Morning Macro Call, Hedgeye CEO Keith McCullough explains why Gold is flashing a “Buy” signal in his proprietary model, and why tonight's State of the Union Address is essentially a non-event from a market perspective.


Is The Worst Yet to Come In Russia? Top Russia Authority to Discuss

Hedgeye’s Macro Team is pleased to continue our special “Behind the Curtain” conference call series to discuss Russia’s Crash with Russia authority Anders Åslund on Tuesday, January 27th at 11:00am EST.

 

Åslund is one of the world’s foremost experts on Russia and the Peterson Institute authority on economic policy of Russia, Ukraine, and Eastern Europe.

 

Åslund is currently calling for Russia’s GDP to plunge -10% this year on sanctions, falling oil prices, and poor structural economic policy.

 

Similar to our previous speaker, former U.S. Ambassador to Russia Michael McFaul, Åslund brings on the ground experience across multiple Russian regimes to offer broader context on Putin’s Russia.

 

Specifically, Åslund served as an economic adviser to Russian President Boris Yeltsin in 1991-94 and to Ukrainian President Leonid Kuchma in 1994-97, followed by key economic advisory positions to the Baltic states and Kyrgyzstan.

 

Åslund will provide 30 minutes of prepared remarks, followed by open Q&A moderated by Hedgeye’s analyst Matt Hedrick.

 

Is The Worst Yet to Come In Russia? Top Russia Authority to Discuss  - HE M putin2

 

KEY TOPICS ON THE CALL WILL INCLUDE 

  • Forecasted view of the Russian economic environment
  • Assessment of the decline of the Russian Ruble and 2015 outlook
  • How falling energy prices will impact the Russian government and budget specifically
  • Discussion of the current and forecasted state of sanctions against Russia and assessment of their impact
  • Russia’s involvement in Ukraine:  War or Resolve?

 

CALL DETAILS

  • Toll Free Number:  
  • Direct Dial Number:  
  • Conference Code: 275897#

Ping for more information.

 

 

ABOUT ANDERS ÅSLUND

 

Anders Åslund has been a senior fellow at the Peterson Institute since 2006. He is also an adjunct professor at Georgetown University. He examines the economic policy of Russia, Ukraine, and Eastern Europe, as well as focuses on the broader implications of economic transition. He worked at the Carnegie Endowment for International Peace from 1994 to 2005, first as a senior associate and then from 2003 as director of the Russian and Eurasian Program. He also worked at the Brookings Institution and the Kennan Institute for Advanced Russian Studies. He earned his doctorate from Oxford University.

 

Åslund served as an economic adviser to the governments of Russia in 1991–94 and Ukraine in 1994–97. He was a professor at the Stockholm School of Economics and the founding director of the Stockholm Institute of East European Economics. He has worked as a Swedish diplomat in Kuwait, Poland, Geneva, and Moscow. He is a member of the Russian Academy of Natural Sciences and an honorary professor of the Kyrgyz National University. He is chairman of the Advisory Council of the Center for Social and Economic Research (CASE), Warsaw, and of the Scientific Council of the Bank of Finland Institute for Economies in Transition (BOFIT).

 

He is author or coauthor of 13 books, including How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, the Caucasus and Central Asia (Cambridge University Press, 2007 and 2013), The United States Should Establish Permanent Normal Trade Relations with Russia (2012), How Latvia Came through the Financial Crisis (2011), The Last Shall Be the First: The East European Financial Crisis (2010), The Russia Balance Sheet (2009),How Ukraine Became a Market Economy and Democracy (2009), Russia's Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed (2007), Building Capitalism: The Transformation of the Former Soviet Bloc (Cambridge University Press, 2002), How Russia Became a Market Economy (Brookings, 1995), Gorbachev's Struggle for Economic Reform, 2d ed. (Cornell University Press, 1991), and Private Enterprise in Eastern Europe (Macmillan, 1985). He is also editor or coeditor of 16 books, including The Great Rebirth: Lessons from the Victory of Capitalism over Communism (2014), Russia after the Global Economic Crisis (2010), Challenges of Globalization: Macroeconomic Imbalances and Development Models (2008), Europe after Enlargement (Cambridge University Press, 2007), and Revolution in Orange(Carnegie Endowment, 2006).


HAIN: Do You Know What You Own?

Takeaway: We’re releasing a Black Book deep dive on HAIN. Dial-in details and materials to follow.

We’re holding a conference call this Thursday, January 22, at 1pm EST to update our short thesis on HAIN.

 

The call will focus on updated financial performance — which includes slowing trends, compressing margins, and deteriorating returns – since our initial short call. 

 

We’ll also take a detailed look at the UK business, which we believe is merely a conventional food business rather than an organic one – and should be valued as such.  We’ll hit on several other key points throughout the presentation, all of which indicate the company is severely misunderstood and mispriced.

 

Our sum-of-the-parts analysis suggests substantial downside.


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