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History's People

“History isn’t really about events – it’s the people who really matter.”

-Glenn Beck


That’s from the intro of the latest US #history book I’ve been grinding through, Dreamers And Deceivers by Glenn Beck. And while I’m sure you have your own opinions about Beck, I personally think he’s a great storyteller.


No, Beck isn’t my political idol (here’s a shocker - I don’t have one!). Neither is President Obama. While sometimes fictional, both of these guys tell stories in a way that makes us feel something. That’s what gives birth to a healthy debate about the truth.


Ostensibly, in a free-market democracy it is The People who really matter. Do they believe in this Marxist #ClassWarfare argument of the “rich” vs. the “middle class”? Or does that insult them? I guess after last night’s State of The Union storytelling we’ll see…


Back to the Global Macro Grind


If you listen to just about anyone who loves Obama’s economic policies, they’ll tell you (as he trumpeted last night) that the “economy is back! growing 5%”. That’s obviously fiction, in year-over-year growth rate terms.


When someone throws that 5% number at you, they either A) don’t get that a quarter-over-quarter SAAR reading doesn’t equate to a year-over-year growth rate or B) are trying to obfuscate the number because the uninformed wouldn’t get it anyway.


Here’s the last 4 quarters of US GDP growth, on a year-over-year growth rate basis:


  1. Q413 = +3.1%
  2. Q114 = +1.9%
  3. Q214 = +2.6%
  4. Q314 = +2.7%


And since our macro model (GIP - Growth/Inflation/Policy Model that, using Bayesian Inference, has done as good a job as any research firm in predicting the rate of change in both growth and inflation for the last few years) was:


A)     Bullish on the y/y rate of change in US #GrowthAccelerating for all of 2013 until the growth rate peaked in Q413

B)      Bearish on the y/y rate of change in US growth starting at the beginning of 2014, as Q114 slowed…


I don’t have to make mediocre apologies for getting the rate of change in long-term bond yields right (bullish on #RatesRising in 2013, bearish on rates surprising to the downside in 2014) either.


Instead, being true to evolving the macro debate on Wall St., what I need to do after the #SOTU2015 speech is remind you that:


  1. The bond market (and economic data for December) signaled that the y/y US GDP growth rate slowed again in Q414
  2. Q414 US GDP growth will be reported much lower than “5% growth” within the coming weeks
  3. The annualized (year-over-year) US GDP growth rate for 2014 will be closer 2% than 4-5%


Obama won’t revise his storytelling about economic growth, after that. But #history will.


As you know, you can make a ton of money on the long side of asset prices tied to both A) Policies to Inflate (not to be confused with real economic growth – see 2011 for details) and B) #GrowthSlowing (buy Long Duration Bonds!). #TLT


What’s much more damning to asset prices than the rate of change in growth slowing is the rate of change in inflation #crashing. That’s mainly because asset #bubbles that were perpetuated by easy money Policies to Inflate get crushed by #deflation.


In hindsight, the #deflation risks to certain asset prices have been crystal clear:


  1. Commodities (CRB Commodities Index = 219, new lows, -30% since June 2014)
  2. Debt – and I mean high yield and junk bonds tied to cash flow streams that have implied inflation expectations


That’s why big debtor nations (and the companies who thrive on leverage to inflation in selling prices) try to avoid #deflation like the bubonic plague. #Deflation hammers debtors.


Japan (BOJ) and Europe (ECB) either convince the world that they can create inflation again – or they do not. After cutting his “inflation target” in ½ last night, the BOJ’s Kuroda looks about as confident about inflation as a chart of West Texas Crude Oil.


When this epic and unprecedented central planning experiment ends, it will be the people who signed off on it who are held responsible, not the politically conflicted speech events themselves.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.74-1.89%


Yen 116.12-120.23

Oil (WTI) 45.02-47.66
Gold 1

Copper 2.48-2.61


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


History's People - Chart of the Day

January 21, 2015

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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,



Keith R. McCullough
Chief Executive Officer


Consensus Macro Memes - 01.07.15 chart

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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


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?

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.

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