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.

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 29^th, 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