This note was originally published at 8am on January 26, 2015 for Hedgeye subscribers.
“Learn not to be intimidated by important people.”
For those of you who don’t know her (I don’t), when it comes to the Private Equity business, Orit Gadiesh (Chairman of Bain & Company) is a very important person.
“Gadiesh is known as the person whose leadership brought Bain out of financial difficulties in the early 1990s… her reputation and mystique are well known in the consulting world. So is her history. She spent two years in the Israeli intelligence unit” learning the aformentioned life lesson in today’s quote. (The Medici Effect, pg 75)
Do “important” people intimidate you? If your house was burning down, my Dad could definitely impress you with a plan. But how about assessing the torching of what used to be your free-markets? Are you just going to stand idle and let these “important” people experiment on the job? Or are you going to let Mr. Macro Market lead you out of the blaze?
Back to the Global Macro Grind…
I won’t be intimidated by people by the name of Draghi, Kuroda, and Yellen. Instead, I’ll do my best to stand here on the front-lines of this foreign currency and market volatility fire and risk manage what’s born out of the expectations they are trying to create.
If I haven’t been, allow me to be crystal clear on how expectations are tracking:
1. Central planners are perpetually trying to create asset inflation expectations…
2. And after they’ve failed to create economic growth, cut to zeros, then tried to redefine “zero”…
3. Global #Deflation of all Policies To Inflate becomes the most paramount to risk manage
Sure, in Burning Euros, they got European stock markets to rip last wk (EuroStoxx600 +5.1% on the wk) – but what else did they get?
1. Euro burnt to a crisp, -3.1% week-over-week, to -7.4% YTD
2. US Dollar +2.7% on the week to +5.2% YTD
3. Commodity #Deflation (CRB Index) -3.4% on the wk to multi-yr lows
4. Oil continuing its epic crash, -7.2% wk-over-wk to -15.1% YTD
5. Dr. Copper -4.4% on the wk to -11.5% YTD
6. Long-Term Bond Yields (10yr UST Yield) down another -4bps to -37bps YTD (1.80%)
Oh, right, and the US stock market had its 1st up week in 4, closing:
1. Dow +0.9% wk-over-wk to -0.8% YTD
2. SP500 +1.6% wk-over-wk to -0.3% YTD
3. Russell 2000 +1% wk-over-wk to -1.3% YTD
Yep, all of the CNBC cheer-leading and storytelling aside, being long a broad measure of the US stock market (2000 stocks in the Russell) for the last year, instead of something that’s low-volatility-high-return like the Long Bond, has sucked.
Back to the 1st paragraph point where I characterized what all of this panic-central-planning has done as a “foreign currency and market volatility fire” (yes, when you’re an unimportant person like me, you can quote yourself!):
1. Last 6 months, European central planners have devalued the Euro by an epic -16.8%
2. Last 6 months, Japanese central planners have devalued the Yen by an epic -13.8%
3. Last 6 months, Canadian central planners have joined, cut, and now devalued by -13.7%
And while it’ll be a national embarrassment to both me and my countrymen if Canada overtakes the Japanese in rate of change terms, the point is that they are trying to smooth the un-smoothable right now – it’s called (drumroll) #volatility:
1. Last 6 months, via FX Burnings > Strong Dollar > Oil Volatility (VIX) is +244%
So I guess managing US equity volatility being +45% in the last 6 months is no problem, right? #Wrong. If you look at most of the performance problems out there in money management land, this time wasn’t different – they all started with volatility breaking out from what Bernanke’s Fed called the new “normal” (10 VIX). In reality, that’s the most asymmetric risk level in US history.
Market #history and positioning doesn’t lie; people do. Here’s the latest look at Consensus Macro in net CFTC non-Commercial futures/options terms:
1. Crude Oil +324,642 net LONG position (vs. +307,819, 6 month avg)
2. Gold +145,742 net LONG position (vs. +82,472, 6 month avg)
3. SP500 (Index + Emini) +71,224 net LONG position (vs. +22,987, 6 month avg)
In other words, when it comes to asset price inflation expectations, the truth is that Wall Street is still betting on the “important” people and their central plans delivering them higher-prices…
In everything other than the Long Bond, that is… where the net SHORT position in the 10yr Treasury is -138,230 (vs. an avg net short position for the last 6 months of -84,336).
“So”, I say cheers to you – for making your independent research thinking vs. a crowded consensus what the legendary Howard Marks would call, “the most important thing.”
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.75-1.86%
WTI Oil 44.06-46.92
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer