This note was originally published at 8am on May 07, 2015 for Hedgeye subscribers.
“God understands more about financial markets than many who write about them.”
-Jean-Claude Juncker, May 6th, 2014
Now that German Bund Yields have quintupled, in 8 trading days, I’m thinking God understands more about financial markets and economic cycles than many who try to centrally plan and smooth them.
For those of you who don’t know who Jean-Claude Juncker is, he’s the former Prime Minister of Luxembourg (1995-2013) and residing President of the European Commission. This guy is a hard-core Eurocrat.
It might just be me, but I was under the impression that these dudes in Europe thought they had this all under control. Didn’t Draghi promise investors “whatever it takes”? If this bond market move is God’s work, Europeans better pray for it to stop.
Back to the Global Macro Grind…
That wasn’t a typo – at one point this morning German Bund Yields flash-crashed, or something like that, to 0.76% on the 10 year. Only last week it was trading at 0.14%. That’s a five bagger!
Since I’m bullish on US Treasuries, that’s not good. Despite weakening US economic data (see the rate of change in the ADP jobs report in today’s Chart of The Day), Treasuries have been down for 7 straight days. #EuropeanYieldRamp is the main reason why.
To be fair to the revisionist historians, they think this is all supply and demand and/or “fundamentally” driven by things like “higher inflation expectations.” I don’t. This is an outright panic-shift in market expectations.
To review where some big market expectations were 10-30 trading days ago:
- Draghi was going to keep rates low (in some cases negative), for as long as it takes
- European growth was being engineered by this lower-for-longer rate policy
- Down Euro was damn good for German, Dutch, etc. “exporters”… and their “stocks”
Then, z-z-z-ooom! (or ka-boom, depending on what you’re long)
- Euro stopped going down (USD stopped going up) as both US jobs and GDP reports slowed
- Oil started to rip on Down Dollar (and a circular supply narrative)
- And out of nowhere, despite Down Dollar, European rates started to rip higher
This morning alone:
- German 10yr Yield = +15 bps to 0.75%
- France 10yr Yield = +14 bps to 1.05%
- *Japanese 10yr Yield = +8 bps to 0.43% (one of the biggest daily % moves in a decade)
And US centric navel gazers are freaking out because US 10yr Treasuries moved 2 basis points off a base of 2.26%. If I’ve said this to investors who have emailed/called me in the last 48 hours 100 times, I’ve said it 1,000 times - #EuropeanYields!
If central planners didn’t give markets the “all-clear” expectation, absolutists who say “well, this isn’t much of a move from such low levels” might have a reasonable point. But that’s not how macro market risks evolve.
There is a massive amount of leverage that is betting on #LowerForLonger in Europe/Japan, and risk models move in percentage terms, not “valuation” opinions. Forget the +25% move in 30 minutes in German Bund Yields, they’re +514% in eight days. #Again!
So what is a man or woman to do when neither stocks nor bonds work?
- Raise Cash – we’ve been moving towards our highest Cash position (57%) of the year in the Asset Allocation Model
- Wish that you’d raised more Cash… and
- Call yourself as dumb as I feel for not selling US Bonds when the #process said buy more
To review the #process. We believe that you:
A) Buy long-term Treasury bonds when growth is slowing
B) Sell them when growth, in rate of change terms, is accelerating
And since I personally didn’t get the memo from God on the Euro Bond Yield move, I am going to evolve the #process and implement prayer this morning. Because, to be honest with you, other than raising cash, I don’t know what else to do.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.86-2.29%
Oil (WTI) 54.13-61.92
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer