This note was originally published at 8am on May 12, 2015 for Hedgeye subscribers.
“When the mob gains the day, it ceases to be any longer the mob.”
In markets, the momentum mob constantly cares about one thing – #charts. Lots and lots and lots of charts. The linear moving average ones are the simplest to scare you with. My 5 year old daughter can generate them on an iPad, so they have the broadest demographic point-and-click appeal. It’s all about the 50 and 200 hundred day, bro.
No matter where you go this morning, here we are – in the midst of another “breakout” in US bond yields. Notwithstanding that this one has been caused by an epic breakout in Global Yields, US equity only guys looking at TLT have the “bearish chart” now inasmuch as they had the uber bearish Oil one down at $43/barrel.
Even though many of you were right on bond yields (lower-for-longer) for 16 months starting in January of 2014, if you remained bearish on bond yields at the 2015 lows like I did, you have been wrong (on bonds) for a month. And now the mob has you by the #charts, so it’s time to … uh, panic?
Back to the Global Macro Grind…
What’s a +28% ramp (in 24 hours) in German Bund Yields, amongst friends? That’s gotta be good for “stocks”, right? Wrong. As the bond yield #charts have “broken out”, sorry bros, it’s been bad for stocks too.
Q: If you can’t be long stocks or bonds, what do you do?
A: Raise cash
At 62% Cash in our Asset Allocation Model, at least we got something right. But most of that “raising cash” came from the equity side of what we liked in Q1. That said, what you really want to know is why I didn’t do the same in Treasuries?
Before I try to answer that question (again), let’s contextualize this epic 1-month move in Global Bond Yields:
- US 10yr Treasury = +34 basis points (bps) to 2.34%
- Canadian 10yr = +45 bps to 1.82%
- German 10yr = +53 bps to 0.68%
- French 10yr = +56 bps to 0.98%
- Italian 10yr = +60bps to 1.86%
- Portuguese 10yr = +84 bps to 2.42%
In other words, even if you don’t look at % moves and rates of change, on an absolute basis being long Treasuries vs. short just about everything else (1 through 5 on that list) was a relative winner!
Not on the performance part (German Bund Yield move was +353% vs. the UST move of +17%). When it comes to getting things right/wrong, I don’t calculate losses in cocoa-puff terms. TLT 1-month losses have been real. I should be held to account for that.
So why didn’t I pull a Jedi mind trick on all of you and book all of our gains in the Long Bond (TLT) at the top (with bond yields re-testing their all-time lows in January, or with the 10yr UTS yield down at 1.85% in April for that matter)?
I.e. there would be no fundamental way for me to explain it within the risk management framework in which our longer-term growth and inflation views evolve.
Which obviously begs the question as to whether or not a 1-month move in bond yields has rendered our #process broken OR it’s simply signaling that stocks and bonds don’t go up forever (with no volatility and no down-days).
To review what we believe (because market #history does):
- Both local and global bond yields falls when the rate of change in growth is SLOWING
- Both local and global bond yields rise when the rate of change in growth is ACCELERATING
With both the trending rate of change in both US and Global Growth #slowing (with our model suggesting y/y US growth slowing to 1.8% in 2H of 2015), there’s no fundamental reason for me to be bearish on Long-duration bonds other than price momentum.
This is where the whole #ChartChasing thing comes into play. In my former hedge fund life I used to see guys chasing 50 and 200 day moving monkeys all of the time. So I taught myself to remain calm and not do that. I shorted Russell 2000 yesterday instead.
If both gas prices and bond yields head higher (from here), someone is going to gain the day. And that’s not going to be the American and/or European consumer. It’ll be a mean macro mob, because their charts will tell you to be short everything.
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 1.91-2.32%
Oil (WTI) 55.62-61.12
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer