This note was originally published at 8am on March 05, 2015 for Hedgeye subscribers.
“At rest, however, in the middle of everything is the sun.”
On this day of in 1616, the Catholic Church banned Copernicus’ book. The establishment’s main issue with the man’s independent research (which correctly implied that the sun was at the center of the universe) was that it didn’t sync with their ideologies and politics.
Today will go down as one more day in central planning history where an unelected man of the mainstream will boil the oceans and part the heavens, raising stock markets to heights the world has never seen before.
That man, who sees himself residing in the middle of everything, is Mario Draghi…
Back to the Global Macro Grind…
You go, Mr. Central Planning man. You go. You are the power and the light – you are the only one who can keep the Italian stock market up while its economy is in recession. Only you, the great Draghi, can see 0% improvement in Greek unemployment as Italian stocks move to +16.5% YTD.
While this is turning into a joke, the actual data fits what I just wrote:
- Italy’s GDP for Q4 of 2014 was -0.5% y/y (revised lower vs. the prior -0.3%)
- Greek Unemployment rose to 26.0% in DEC from 25.9% in NOV
Oh, right - the latest central planning of European stock markets didn’t really ramp until JAN, so I’m sure Greek government work is booming now and these structural debt, deflation, and unemployment problems all went away as a result…
And then there was moarrr #Deflation…
Remember that, perversely, moarrr cowbell from Draghi = moarrr #StrongDollar driven #Deflation:
- Cowbell = Centrally Planned Currency Devaluation
- EUR/USD is getting smoked to -8% YTD and multi-yr lows of $1.10 ahead of Draghi’s latest (830AM EST)
- US Dollar Index is rocketing to $96.21 on that, +6% YTD and +21% from its 2014 lows!
- Commodities (CRB) Index (19 Commodities which largely trade in Dollars) continues to crash -28% y/y
- Oh, and WTI Oil, which you could have chased at $105 at this time last year, has crashed > 50% since
So we definitely need to have Bloomberg and CNBC cheer on more of this. Access to these Sun-smoothers drives ad revs. #clicks
Put another way, until either the Europeans and/or Japanese fail outright (i.e. when their people figure out this does jack for the economy, but keeps getting the bureaucrats and Eurocrats (and their all-access media) paid), this #StrongDollar + Down Rates #Deflation will continue.
Not to be confused with #StrongDollar + #RatesRising (our call on the US in 2013), the Down Rates (both locally and globally) part is critical to contextualize, in global growth expectations terms.
It’s obviously one thing to obfuscate Policies To Inflate with real-economic growth – but it’s entirely another to have neither inflation, nor growth. Japan (for the last decade), and Europe currently, that is …
At least in the USA we get to get paid owning all of the asset allocations and sector style exposures to this 17th century gong show of the vanities. We signaled doing more of the pure play on US domestic consumption #accelerating yesterday in Real-Time Alerts (buy Housing, ITB, on red!).
To review what we like during Global #Deflation:
- US Dollars (that’s our entire FX allocation, and it’s beating both US stocks and bonds YTD by a factor of 3)
- Long-duration-low-volatility Bonds
- US Housing (ITB), Consumer Discretionary (XLY), and Healthcare Stocks (XLV)
And what we really don’t like:
- Burning Euros and Yens
- Stocks and bonds that have the most #Deflation risk (energy and the financials)
Our Global Macro view is not that complicated. It is how you play Global #Deflation and #GrowthSlowing, while the US economy gets it’s “easy compare” Q1 sequential growth bounce (see Theme #2 @Hedgeye called #Quad414 for details).
And while it has been fun to be bullish on the Weimar Nikkei (in Burning Yen terms), which is handily beating US stocks and bonds YTD at +7.5%, that’s really just a rolling of the bones that can go bust whenever this epic human experiment in trying to bend gravity and the sun does.
Our immediate-term Global Macro Risk Ranges are now (intermediate-term TREND view in brackets):
UST 10yr Yield 1.89-2.17% (bearish)
SPX 2083-2117 (bullish)
Nikkei 18409-18998 (bullish)
USD 95.01-96.28 (bullish)
EUR/USD 1.10-1.12 (bearish)
YEN 118.67-120.66 (bearish)
Oil (WTI) 48.22-52.16 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer