This note was originally published at 8am on January 21, 2015 for Hedgeye subscribers.
“History isn’t really about events – it’s the people who really matter.”
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:
- Q413 = +3.1%
- Q114 = +1.9%
- Q214 = +2.6%
- 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:
- The bond market (and economic data for December) signaled that the y/y US GDP growth rate slowed again in Q414
- Q414 US GDP growth will be reported much lower than “5% growth” within the coming weeks
- 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:
- Commodities (CRB Commodities Index = 219, new lows, -30% since June 2014)
- 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%
Oil (WTI) 45.02-47.66
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer