This note was originally published at 8am on March 10, 2015 for Hedgeye subscribers.
“A powerful agent is the right word.”
From San Francisco to Boston to New York (and today Chicago) I’ve been on the road meeting with a lot of investors in the last few weeks. Finding the right words for macro market risks gets less hard when I boil it down to one - #deflation.
That’s it. One word. You are either positioned for its risks or you are not.
Its risks are far reaching, inasmuch as the opportunities it presents will be. For the average household in America that doesn’t own stocks and bonds it’s a big tax cut. For the average corporation who sells anything with deflating prices, it’s a big headache.
Back to the Global Macro Grind…
Can the world’s central-planners arrest the #deflation? Or are they now perpetuating it?
To review slide 8 of our current macro deck:
- Burning Euros are not going to magically create inflation
- Burning Yens are not going to produce inflation “targets” either
Instead, $1.07 Euro (-11% YTD vs. USD) and $121.67 Yen (-1.5% YTD vs. USD) are creating the mother of all ramps in the US Dollar. Picking up right where it spiked to last week, the US Dollar Index is already +0.7% this week to +9.1% YTD.
What we call the Correlation Risk (of #deflation) to #StrongDollar remains obvious at the epicenter of where you should be crushing it on the short side and/or have a 0% asset allocation (Commodities):
- CRB Commodities Index was down another -0.4% yesterday to -4.7% YTD (with US stocks and Treasuries up on the day)
- Gold is down another -0.7% this morning to $1159 (-2.1% YTD)
- Copper is down another -1.8% this morning to $2.62 (-7.1% YTD)
In other words, in terms of what to avoid, the easiest question I’ve been answering on the road for the last 6 months remains one word too – Commodities. Why on god’s good earth of deflationary forces would you buy what was the most levered bet on US Dollar destruction into 2011-2012?
Moreover, if you have intermediate-term targets of $1.05 and $135 Euro and Yen, respectively (vs. USD)… and those targets look increasingly probable by the day, why wouldn’t you keep pressing the long Consumer (XLY), short Energy (XLE) position?
A: in a word – “valuation”
Especially when Oil was bouncing, we were getting a lot of “but everyone is short oil and underweight Energy stocks – there’s a lot of value here – why can’t Oil go back to $70?”
In Hedgeye process terms, the words I’ve been using to answer that line of questioning are:
- Oil (WTI) has an intermediate-term TREND “price deck” in our model of $36.23-57.82/barrel
- Both the net LONG position (futures/options contracts) and curve is looking for higher prices than that
- Levered Energy Equities (and their Debts) are not pricing in either the top or bottom end of our range
To be sure, I’d definitely be using the wrong words to describe the most probable #deflation scenario for Energy stocks and bonds if I was a banker. But I’m not a banker. I’m a risk manager. And the only thing I care about is getting to the right words and answers.
If you’re on board with our Global #Deflation theme, we still think the wrong asset allocation answers are:
- Buying Russian stocks because they are “cheap”
- Buying Greek stocks because they are “cheaper than German stocks”
- Buying “your own oil well”
Yes, listen to the radio, you too can buy your own oil well and be called what every other person who got sucked into doing the same for the last year of oil #deflation (one word – lemming).
Finally, we’ve been getting a ton of questions on why German Bund Yields can remain this wide versus US Treasury Yields (0.31% 10yr Bund yield this morning vs. UST at 2.19% = +188bps spread, widest of the year)…
A: I don’t know.
Those are 3 words I have no problem using as I age. The more I learn about macro markets and their histories, the less I know. That said, I still think that if Janet keeps one word in the Fed’s “language” at the March 18th meeting (#patient), US 10yr Yields are coming in hot.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.92-2.27%
Oil (WTI) 48.14-51.77
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer