This note was originally published at 8am on February 10, 2015 for Hedgeye subscribers.
“Every moment in business only happens once.”
I started reading Peter Thiel’s Zero To One on the treadmill yesterday. That’s the opening sentence of one of the better intros I’ve read in a while on independent thinking:
“… it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1.”
If I didn’t passionately believe in creating something new here @Hedgeye, I’d have just gone back to doing what I did before. While a lot of people have asked me about that over the years, a lot less have asked lately. That means building this only happens once.
Back to the Global Macro Grind…
Whether it’s the birth of your children or an entrepreneurial business strategy that is unique to you and those around you, this is why you get up in the morning – to find special moments in your life that only happen when preparation meets opportunity.
This is one of the core problems I have with being centrally planned. There is no creativity or progression in that. To think that some room full of bureaucrats can smooth non-linear economic realities like growth and inflation is downright regressive.
But no matter how creatively destructive we are in building our businesses, we have to deal with these people, for now. What happens when the Fed goes from 0% to n? And what are the unintended consequences associated with moving preemptively?
Post a rainbows and puppy dogs jobs report, both US stocks and bonds have been down for 2 days… Why?
I’m not sure what got rates to go up more:
A) The short-term alleviation of fear that the US jobs picture has hit its cycle-peak
B) Legitimate fear that the Fed raises rates during global #GrowthSlowing + #Deflation
As I’ve said many times, what the Fed SHOULD do with a CPI trending towards (and below) 1% and COULD do are two very different things. Can you imagine they signal a rate hike into jobs reports that get as bad as the last 6 were good?
It isn’t just #deflation that the Fed should be concerned about – it’s their broken forecasting model. Janet Yellen is using a carbon copy of what Ben Bernanke used. In forecasting growth, they overweight the most lagging of late-cycle economic indicators.
For those of you that don’t know that Non-Farm Payrolls (Employment) are the latest of late-cycle, please see today’s Chart of The Day where Christian Drake reminds you of when the cycle of payrolls peak à AFTER the cycle is already slowing!
Back to the Global #deflation risk that blew up plenty of portfolios between late-September 2014 and January 2015’s lows:
Sure, Oil (WTI) was +2.1% yesterday and is +9.5% for the month of February alone – but that’s just a counter-TREND move within a nasty deflationary risk. My immediate-term risk range can get you $43 oil as fast as this bounce can stop at $54-55/barrel.
Ahead of the March 18th Fed meeting, we could very well be sitting here in early March as concerned about Global #Deflation risk as we were at the beginning of January!
Is it easier for the Fed to keep using the same model that has rendered its growth and inflation forecasts inaccurate almost 70% of the time since 2007 than to create a new one?
That’s a rhetorical question. Sadly, they’re going to go from zero to something – and there will be loads of cross asset class volatility associated with their own flip-flopping internally about timing that.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.62-1.99%
Oil (WTI) 43.07-54.88
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Disappointing all around. Even on a hold-adjusted basis, Q4 missed expectations. Lower market share and cautious VIP commentary.
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The remarks below were delivered by Hedgeye CEO Keith McCullough as part of an update to our macro team's #GlobalDeflation theme at Asset Allocation 2015: Liquidity, a conference hosted by The Boston Security Analysts Society. He was asked how he expects the Fed to dance its way through the next 6-12 months.
In the past, six or seven years ago, I would mistakenly start with what the Fed should do, versus what the Fed could do. Of course, these are two very different things.
I’m not Janet Yellen, I never want to be Janet Yellen. And she doesn’t want to be me. What she could do here is raise rates, with the deflationary force and global growth slowing at the same time. That would be a huge policy mistake.
What the Fed is effectively trying to do—and this is the core of central planning—is promise you, my mom, my dad, and the whole world, certainty. That’s not possible. So whatever their plan is, I’m not buying it. I don’t think you can plan certainty with respect to things like economic gravity.
So, what would I plan for? I’d plan for uncertainty.
And I think the most uncertain thing you could have right now is not only how the Fed reacts to their inability to forecast accurately, but also, how they act in the moment.
Again, I think if Janet Yellen is sitting there, raising rates into what I think is going to be a sub-1% CPI and deflation rolling out like it did between September and January, that could be a very nasty thing that she will have to address in Jackson Hole later this year.
Don’t forget, we have only had one Jackson Hole in the last four, where we didn’t have to get a big central plan from the Fed.
It’s going to be an interesting dance to watch.
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Editor's note: This is a brief excerpt from Hedgeye morning research. For more information on how you can become a subscriber click here.
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Good #StrongDollar morning to you!
The +0.6% USD Index move to +5% year-to-date is good for plenty of commodity-based inverse correlation moves (see #deflation); WTI Oil -1.2% (after a -5.3% week), Gold -0.7% (after a -1.8% week) – Copper still looks like death.
On a related note, Japanese “Weimar Nikkei” is all sorts of jacked up on weak Yen (vs USD) to 15-year highs at +5.8% year-to-date – and this is after plenty of headline news that Japanese Corporates (70% of them) see “no need for more easing.”
We can’t imagine why… it’s only been 18 years.
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