This note was originally published
at 8am on June 01, 2015 for Hedgeye subscribers.
“We are here to guide the public opinion, not to discuss it.”
By evidence of both his actions and the aforementioned quote, by the time of Napoleon’s self-organized coronation at Notre-Dame on December 2nd, 1804 he wasn’t the same man of The People. Sadly, with most things political power, some level of liberty was lost.
It wasn’t always that way in France. After replacing the aristocracy (The Directory), Napoleon introduced “nobility based on merit – one in which 20% came from the working classes; 58% from the middle classes…” (Napoleon, A Life – pg 465)
Two hundred years later, America is much more like France that it has ever been. After a negative -0.7% GDP report on Friday, both the US government and the un-elected Federal Reserve will be guiding mainstream media opinion this morning, not discussing it.
Back to the Global Macro Grind…
So let’s discuss why the US economic data continues to slow here in 2015. The government has not yet been able to centrally plan away the calendar. It’s June, and it’s not snowing anymore.
Just to get you caught up on the Q2 (non-weather adjusted) US economic data:
- US Retail Sales (which represents almost 25% of the GDP report) slowed to 0.9% year-over-year in April
- US Durable Goods slowed to -2.3% year-over-year in April
- The Chicago PMI got wrecked (that’s a May print) to 46.2 vs. 52.3 in April
To be fair, Chicago’s not all about the Blackhawks right now. The windy city’s debt just got downgraded to junk. And, to be doubly fair, the US Housing data (pending home sales reported last week +3.4% in April) has been as good as the #LateCycle data = bad.
Yeah, being long #LateCycle stuff like inflation expectations and industrial stocks has really sucked for the past few weeks. Then again, that asset allocation has really really really sucked since, well, around this time last year.
Even though the US Dollar slowed its bounce on the bad US GDP report on Friday, bigger picture, it was up for the 2nd straight week, +0.9% to +7.4% for 2015 YTD – and here’s what else happened in macro markets on that:
- Burning Euros and Yens dropped -0.2% and -2.1%, respectively (YTD = Euro -9.2%, Yen -3.6%)
- Commodities (CRB Index) was -1.1% on the week to -2.9% YTD
- Energy (XLE) and Industrial (XLI) stocks led USA losers -1.0% and -1.9% wk-over-wk, respectively
Did I say being long the Industrials during a #LateCycle slowdown sucked? Yep. Big time. Why on earth would you be long anything that is trading on peak-margins as A) the cycle is clearly slowing and B) the US Dollar is strengthening?
To get the US Dollar and Rates right, you do have to get the rate of change in US growth (and its expectations) right. But you can’t ignore what all of these other slowing global economies are seeing from a currency devaluation perspective all the while.
The Brazilian Real, for example, lost another 2.7% of its value last week (it’s -16.6% YTD vs #StrongDollar) and the flailing Russian Ruble had a run of the mill -4.5% currency valuation draw-down.
Right. Right. #LetsNotDiscussThis
Instead, let’s discuss what everyone and their revisionist macro brother was chasing in terms of a narrative (when the German Bund Yield tapped 0.75% three weeks ago; this a.m. = 0.49%) – that “inflation is back and accelerating”, or something like that…
- Break-evens (5yr US) dropped 8 basis points and are now down -13bps in the last month to a paltry 1.61%
- US 10yr Yield fell another 9 basis points on the week to 2.12% (another -10% correction, on bond yield terms)
I know, I know. Do not tell the Bond Bears that they got plugged calling the mother-of-all-tops in the Long Bond (again). We’re having too much fun front-running this epic mismatch between #GrowthAccelerating expectations and economic reality.
From a sentiment perspective, at least the shorts have been covering their Long Bond positions – here’s the latest Consensus Macro report, in non-Commercial CFTC futures/options contract terms:
- Long-Term Treasury (10yr) net SHORT position has been cut in half from -163,965 (6 month avg) to -81,045
- US Equities (SP500 index + Emini) net SHORT position has shot up to -56,264 from a +26,103 6 avg (6 months)
In other words, consensus doesn’t believe that the US government can make up another version of GDP fast enough and has expressed #GrowthSlowing explicitly by being A) less bearish on bonds and B) more bearish on stocks.
And if you’re sitting there saying to yourself that this is actually bullish for both stocks and bonds, you’re probably right. All you need is one more bad jobs report and both the Fed and US government is going to guide you to believing that sucking is the new bull case.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.99-2.19%
Oil (WTI) 56.99-61.31
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer