This note was originally published at 8am on January 20, 2015 for Hedgeye subscribers.
“People do predictable things as they age.”
People also do unpredictable things. Give them more than a few cocktails and you’ll see that prediction in motion! While simple, the aforementioned quote is true too. It comes from a macro research book I just finished reviewing called The Demographic Cliff:
“The average family borrows the most when parents are age 41, typically the time of their largest home purchase. They spend the most at age 46, although more affluent households reach that peak later… People save the most at age 54 and have their highest net worth at age 64…” (pg 11). These are obviously generalizations, but they are about the most important spending generation in American #history (Baby Boomers).
Interestingly, but not surprisingly, Life-Cycle Economics was one of the most talked about macro topics when Darius Dale and I were on the road seeing Institutional Investors in NYC last week where I’d ask everyone the question we have on slide 22 of our Q1 Macro Themes Deck: “What Matters Most: Gas Prices, Jobs, or Demographics?”
Back to the Global Macro Grind…
While many like to call themselves “long-term investors”, when it comes to answering the question in our Chart of The Day thoroughly, I think you should call yourselves multi-duration, multi-factor, risk managers. That’s my new marketing pitch!
Here’s one way to think about all 3 factors, across durations:
- GAS PRICES – immediate-to-intermediate-term (bullish TRADE and TREND duration impact to consumers)
- JOBS – intermediate-term (making a bearish turn? The cycle tends to be less lumpy and cyclical, or TRENDING)
- DEMOGRAPHICS – long-term (what was a long-term tailwind in the USA, Japan, and Europe is now a headwind)
Yep, after a long weekend, that’s a lot to think about – and I’m thinking that the immediate-term positioning of Consensus Macro futures/options in both the Spooz and Long Bond doesn’t quite agree with me yet on JOBS and DEMOGRAPHICS:
- SP500 (Index + Emini) = +110,971 net LONG position (-59,269 last wk but up big vs the 1yr avg of -11,681)
- US 10yr Treasury = -(187,997) net SHORT position (+62,166 last wk but a lot shorter than 1yr avg of -62,100)
- Crude Oil = +326,134 net LONG position (+11,230 last wk vs. 1yr avg of +368,447 net LONG contracts)
What consensus continues to think about is perpetually being long Macro Style Factors (growth and inflation) that have worked in the past. This implies nothing but volatility around these changing expectations in the future.
Let’s go through these (SPX, 10yr, Oil) one by one. First on US equity beta (SPX):
- SP500 (SPX) had its highest net LONG position since 2007 only 2 weeks ago at +170,240
- But the SPX didn’t pay the bulls, closing down for the 3rd straight week last week during its -3.5% correction
- Within the SP500’s -1.9% YTD return, the Top 2 Sectors are #GrowthSlowing + #Deflation winners
- Top 3 YTD = Utilities +2.6% last wk to +3.0% YTD, Healthcare (XLV) +2.9% YTD, Consumer Staples (XLP) +1.6% YTD
- Bottom 3 YTD = Financials -2.6% last wk to -5.0% YTD, Energy (XLE) -5.0% YTD, Consumer Discretionary (XLY) -3.4% YTD
Then on the best way to be long our global #GrowthSlowing + #Deflation view:
- UST 10yr Yield was down another -11bps last week to -33bps (-15% YTD) to 1.84%
- Yield Spread (10yr minus 2yr) was down another -3bps last wk to -15bps YTD
- Long-term Treasury (TLT) is already smoking everything US stocks at +6% YTD (pre-int payments!)
Finally, on the beloved Oil “space”:
- WTI Crude has its 1st up week in the last 8, closing up a whopping +0.7% last week
- WTI Crude has already given up another -3.1% to start this week and is already -11.4% YTD
- Whoever bought me the falling steak knives catching set for my birthday isn’t invited to next year’s party
In other words, you and I are having a great time to start 2015. Consensus Macro is not. And that’s mainly because consensus does predictable things as a global growth, inflation, and demographic cycle ages past a long-term cyclical peak.
Before I leave the keyboard this morning, here are some other big movers in Global Macro from last week that you need to keep front and center ahead of the BOJ and ECB central planning decisions this week:
- The Euro (vs. USD) was -2.3% last wk and signaled immediate-term TRADE oversold at $1.15
- Gold ripped +5% last week and is showing follow-through, up another +1.3% this a.m. to $1291
- Dr. Copper got blasted for another -5% #deflation last week and is down again this morning to $2.56
Of all that, what matters most?
All of it does. It’s interconnected. And I think it’s suggesting that Mario Draghi might not be able to deliver the Policy To Inflate drugs that central planning fans are begging for on Thursday.
Any short-term bottom in Euros = Down Dollar (from overbought highs) – and Gold loves nothing more than Down Dollar + Down Rates, at the same time.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.76-1.90%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer