This note was originally published at 8am on June 05, 2015 for Hedgeye subscribers.
“To cannon, all men are equal.”
If the 2015 “call” on macro markets has been that bad news is good, what happens when bad news is bad? Yesterday was ugly, globally. Darius Dale did a good job outlining why from a global #GrowthSlowing perspective.
But what about from a “liquidity” perspective? It’s one thing for strategists to be telling you that European Yields are rising because “inflation is back.” It’s entirely another for others to say that’s happening because growth is too.
If both of those lines of reasoning are wrong, and the real reason is the beginning of a liquidity event coupled with #LateCycle growth slowing… to most portfolios, this is going to feel like cannons. Unless it’s different this time, Volatility ↑ + Illiquidity ↑ doesn’t end well.
***Click here to watch The Macro Show at 8:30am ET with Director of Research Daryl Jones.
Back to the Global Macro Grind…
By characterizing European growth and #Deflation risks the way he did, I think un-elected-central-planning-overlord Draghi made his first huge mistake on Wednesday. He tried to talk down stock and bond market volatility, so both ripped!
I’ll say this until I’m dead (so bear with me in the meantime): in the long run, central planners cannot smooth economic gravity and/or control market volatility.
On that front, one of the biggest mistakes Bernanke made between 2006-2011 (too high on growth expectations; too low on volatility expectations) was the same one Draghi is making right now.
If I’m right on Slower-For-Longer (on growth), but wrong on Lower-For-Longer (on rates), that may very well mean we have finally reached the beginning of the end of bad-news-is-good.
A) That would mean real-time growth forecasts and expectations are getting cut (like they are starting to now)
B) And markets are starting to believe central planners have lost control of the short-term control mechanism for that
To be crystal clear on what that control mechanism is – it’s cowbell and cannons.
Cannons, as in unadulterated and obliterating launches of money printings and bond buyings. Cowbell, as in “whatever it takes” when German Bund Yields (10yr) double, in 72 hours!
In the absence of both, what do you get? (see your portfolio returns from yesterday for details)
While many of you have rightly risk managed markets since 2009 by understanding the basic mechanisms of bad news = more cowbell/cannon = good (for stocks), here’s the last month in Global Equities:
- Dow Transports -3.6% month-over-month
- Hang Seng -3.5% month-over-month
- South Korea’s KOSPI -4.6% month-over-month
- Poland’s stock market -5.7% month-over-month
- Brazil’s stock market -5.9% month-over-month
- Argentina’s stock market -8.8% month-over-month
Bull markets in Global Growth? Cherry picking? Not really. If this table of 6 channel checks isn’t in your “global growth is accelerating” note to clients, at least we agree to agree you’re obfuscating reality in order to appeal to the bullish proclivities of your base.
The best month-over-month performer in Global Equities is the Shanghai Composite Index at +16.9%. So, if you want to really make some perma bulls some money, you should just call it A) what it is and B) what it has been – Moarrr Cowbell!
At this point, the Chinese are coming out with it daily. That’s right Chinese margin broker. You go bro! That’s how you do this. We taught you how to do this. You get it. So pump it!
Japanese stocks keep working because the BOJ gets the joke too. In both Europe and the USA (where secular demographic slowing is as obvious), extending and pretending that “growth is back” is only going to turn the cannon on the Fed and ECB themselves.
Our immediate-term Global Macro Risk Ranges are now (with our intermediate-term TREND views in brackets):
UST 10yr Yield 2.02-2.39% (bearish)
SPX 2085-2111 (bullish)
RUT 1236-1264 (neutral)
Nikkei 20363-20649 (bullish)
VIX 13.51-15.75 (bullish)
USD 94.88-96.80 (neutral)
EUR/USD 1.07-1.14 (bearish)
YEN 123.66-125.62 (bearish)
Oil (WTI) 56.80-61.48 (bullish)
Natural Gas 2.53-2.69 (bearish)
Gold 1170-1205 (bullish)
Copper 2.65-2.79 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer