“The truth was incredible enough.”
“It was so incredible, in fact, that a strange thing happened after it was reprinted in newspapers from coast to coast… The public didn’t believe it.” (Dreamers and Deceivers, pg 19)
In a riveting account of how former US President Grover Cleveland kept both his sickness and surgery a secret, in the aforementioned quote Beck describes America’s reception to investigative journalist, E.J. Edwards, discovering the #truth.
What was the #truth about US economic growth in both December and Q4 of 2014? It slowed. As growth slowed and #deflation expectations took hold, the #truth is that investing in the Long Bond (TLT) instead of late-cycle stocks got you paid.
Back to the Global Macro Grind…
In stark contrast to this historical metaphor of groupthink in trusting officialdom in the late 19th century, I’m thinking that if you told most Americans that year-over-year growth in US GDP is closer to 2% than it is 5% - they’d believe you.
Most upstanding humans believe in those who fight for the #truth every day too. While there used to be a lot more of them in the US financial media, they call them #Patriots – “a person who vigorously supports their country and is prepared to defend it.”
My congratulations to the New England Patriots for winning another Super Bowl. Whether you like the man or not, I think you have to respect Tom Brady’s team leadership. The man is all about the team and the system he plays for; not about himself.
I play for the team that likes the Long Bond more than the Dow in 2015 – here’s the breakdown of the YTD score:
1. Dow Jones Industrial Index down -2.9% last week to finish JAN -3.7%
2. SP500 down -2.8% last week to close JAN down -3.1%
3. S&P Financials (XLF) down another -3.2% last wk to finish JAN -7.1% (worst S&P Sector)
4. S&P Utilities (XLU) -1.7% wk-over-wk to close JAN up +2.3% (best S&P Sector)
5. Long-term Treasuries (TLT) +10% YTD (pre interest payment) #timestamped
Academics like to talk about what was “causal” in driving performance numbers. I like to write about what is. There is very little to no evidence to refute that a slowing in the rate of change in both growth and inflation isn’t bad for certain macro investing styles and exposures – and very good for others.
Since Long-term Bond Yields had been front-running this Q4 GDP #slowing news since December, last week was more of an exclamation point than it was a new sentence about what actually happened in the US economy:
1. US 2yr Yield was down -3 basis points on the week, but are already down -21bps (-31%) YTD
2. US 10yr Yield was down -15 basis points wk-over-wk, but are already down -52bps (-24%) YTD
3. Yield Spread (10yr minus 2yr) compressed another -12bps last wk to -31bps (-21%) YTD
This is why it should surprise no one who is bearish on bond yields that:
A) US Regional Bank Stocks (KRE) are even worse than XLF at -9.5% YTD
B) US REIT Stocks (VNQ) are crushing it at +6.8% YTD (pre dividends)
Yep. It’s all the same macro trade. If you got the direction of both growth and inflation right, you got bond yields right (and everything that correlates positively/negatively in either equity style factors and/or asset allocations right).
First, have a #process that allows you to embrace the uncertainty of each and every centrally planned market day. Second, be prepared for a short-term correction in what’s been nothing short of a parabolic move in the USD vs. other devalued currencies.
Yep, that’s the other thing that happened as the US Dollar stopped going up at an accelerating rate last week. Some of the extreme correlation trades (CRB Index and Oil vs USD) went the other way:
1. CRB Commodities Index +1% last wk to -4.8% YTD
2. WTI Oil +4.5% last wk to -11.3% YTD
So just take the time to observe Mr. Macro Market’s message (i.e. don’t try to force a pass at the goal line when you have time to run the ball). As #Patient GDP Patriots, I’m confident we can intercept hurriedness, and capitalize on the other team’s mistakes.
Our intermediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.65-1.79%
Oil (WTI) 43.61-48.34
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer