Lower For Longer

This note was originally published at 8am on April 02, 2015 for Hedgeye subscribers.

“I find my life is a lot easier the lower I keep everyone’s expectations.”

-Bill Watterson

 

For those of you who aren’t into Hedgeye-style Fed and Global #Deflation cartoons, may I suggest some ole school Calvin & Hobbes? Bill Watterson syndicated that uniquely American comic strip during some of the best of US economic times, then stopped.

 

Lower For Longer - 11

 

“Watterson stopped drawing Calvin and Hobbes at the end of 1995 with a short statement to newspaper editors and his readers that he felt he had achieved all he could in the medium.” (Wikipedia)

 

What if US bond yields break to all-time lows, and I just stop? This is not the 1990s. As you can see in our Chart of The Day, the world is getting older at its fastest rate. As Global #GrowthSlowing gets priced into bond yields, your market life gets easier accepting that.

 

Back to the Global Macro Grind

 

As we roll into our Q2 Global Macro Themes call (April 7th) and I look back on the most thought provoking slides of our Q1 deck, this chart we are showing you again today is a critical one to consider from a long-term global demographic perspective.

 

What we are showing you here is the world’s 65+ year-olds as a percentage of 25-54 year-olds, in rate of change terms. And the investment implications associated with this demographic reality are quite simple:

 

The number of aging baby boomers who are inclined to allocate retirement assets to Fixed Income instead of Alibaba (BABA) or Go Daddy (GDDY) stock is accelerating! So I’ll reiterate our uber bullish call on the Long Bond (TLT) again this morning.

 

Lower-rates-for-longer? Yep. Here’s what drove the outperformance of bonds vs. US stocks (again) yesterday:

 

  1. In rate of change terms, the ADP employment report slowed (again), sequentially in March
  2. USA’s ISM slowed to 51.5 in March vs. 52.9 in February
  3. The “employment” component of the ISM slowed to 50.0 MAR vs. 51.4 FEB

 

In other words, anything that walks or quacks like a slowing US jobs picture is not a duck. To the bond market, it’s a dove. And, my newest bff Janet, is the Mother of All Doves!

 

In terms of risk management levels for the US 10yr Bond Yield:

 

  1. The immediate-term TRADE range is now 1.82-1.93%
  2. Long-term TAIL risk resistance remains up at 2.39%
  3. And there’s no intermediate-term TREND support to the all-time closing lows

 

Since all-time remains a very long time, we’re thinking that Americans who are predisposed to get themselves levered up with cheap credit are going to absolutely love the idea of a 3% 30yr mortgage rate.

 

Put another way, the more right we are on Global #Deflation and slower-for-longer Global GDP growth rates, the more bullish we’ll probably get on Housing (ITB) as all of the “folks” who are paying peak US rents, will see the affordability equation on buying improve.

Lower For Longer - Deflation cartoon 02.24.2015

Getting back to why the Tizzle (TLT) shot up to +5.1% YTD yesterday (+1.3% on the day vs. SP500 -0.4% to 0.0% for 2015), what could Mr. Macro Market possibly be front-running now? How about the 1st slowing NFP (non-farm payroll) number in the last 7 months?

 

My man Hatzius @Goldman wrote a nice piece of rate of change research on this NFP matter last week that our most recent Employment Cycle conference call pointed to in the week prior to that – the probability of payroll gains slowing, is rising.

 

And, at the end of the day, with:

 

A)     #StrongDollar +

B)      Global #Deflation

 

Already messing with Janet’s former June rate hike expectations… what do you think she is going to do next if C) is a deteriorating series of US employment data?

 

Ah, lower-for-longer, eh! I find my life easier still thinking this way.

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND views in brackets):

 

UST 10yr Yield 1.82-1.93% (bearish)
SPX 2037-2076 (neutral)

RUT 1239-1276 (bullish)
Nikkei 19002-19484 (bullish)

VIX 13.13-16.67 (bullish)

USD 96.93-99.11 (bullish)
EUR/USD 1.06-1.10 (bearish)
YEN 118.71-120.95 (bearish)
Oil (WTI) 45.81-50.99 (bearish)
Gold 1166-1208 (bearish)

 

Best of luck out there today and enjoy your long weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Lower For Longer - 04.02.15 chart


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