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Macro's Visceral Edge

This note was originally published at 8am on June 15, 2015 for Hedgeye subscribers.

“Power’s flow and ebb can have a visceral edge.”

-Moises Naim

 

Macro markets tend to make you feel something. The people who are at wit’s end trying to bend and smooth economic gravity have feelings too. This weekend I found the perfect book for some of their central-planning-power lost. Ironically, it’s called The End of Power.

 

Now that the world has seen almost 600 rate cuts (since Lehman collapsed) and we’re in the midst of a #LateCycle slowdown, is this the beginning of that end? Or is it just my cyclical confirmation bias that Moises Naim tapped into?

 

“Long established, big players are increasingly being challenged by newer and smaller ones… what they are fighting so desperately to get and keep – is slipping away. Power is decaying.” –Naim (pg 1)

 

Macro's Visceral Edge - campfire cartoon 10.31.2014

 

Back to the Global Macro Grind

 

Isn’t that a nice way to start your week? After doing California last week, I’m in London today. I’m looking forward to seeing whether or not European investors have a visceral response to both the US cycle and secular demographic data #slowing.

 

#NoWorries, mates.

 

The way this macro show in the US goes is pretty straightforward. Just read the Barron’s Roundtable for a consensus on that. Yep, growth slowed due to “one offs… weather… etc.” but it will “bounce back” – so back end load those growth and earnings forecasts in 2015.

 

As you can see in the Chart of the Day, after the Old Wall and its media got blindsided by the Q1 earnings season (smoked in January) it proceeded to cut earnings estimates for the 1st half of 2015. In the 2nd half (and 2016) it’s right back to rainbows and puppy dogs.

 

Notwithstanding that you’d have to see things like producer prices (commodities, etc.) ramp big (from here) while:

 

A) the Dollar is rising due to

B) consensus expectations of a “rate hike”,

 

we’re still calling for both a cyclical and secular (demographic) slowdown.

 

Newsflash: to get things like Oil prices and PPI (producer prices) up year-over-year, what the Fed actually needs to do is devalue the Dollar and start talking up no-rate-hike. In other words, the bull case for stocks, commodities, and bonds is #SlowerForLonger.

 

Don’t buy that narrative? Or does it just make you feel something that just ain’t right? Macro markets don’t feel anything – they just tick. Last week’s catalyst for the Dow Jones Industrial Index (DIA) to be up for the 1st week in the last 4 was a DOWN DOLLAR:

 

  1. US Dollar Index  was down -1.4% last week (down -4.5% in the last 3 months)
  2. Dow, SP500, and Russell 2000 +0.3%, +0.1%, and +0.3% on the week, respectively
  3. Commodities (CRB Index) = +0.4% week-over-week (+4.1% in the last 3 months)
  4. Oil (WTI) = +1.4% week-over-week (+14.7% in the last 3 months)
  5. Gold = +1.0% week-over-week (+2.2% in the last 3 months)

 

Oh yeah, baby – how do you feel about that? And how, by the way, would you feel if the Fed does precisely what the Fed has been doing since that ugly March employment data point (released at the beginning of April, arresting the USD at epic 10 month highs)?

 

Need #MoarrrEasing? If you are in the business of never seeing a US asset price depression/recession again, I think the answer to that question is yes.

 

I think they called it The Great Recession. In reality it was the last time the US cycle slowed, but the 1st time that its core consumer spending cohort (35-54 Year old #Boomers) saw the year-over-year % change in population growth go negative.

 

(hint: 35-54 yr-old population growth is still negative and will be until the year 2020 – so I’m all in on a 2020 rate-hike)

 

Oh, and the meeting of that cyclical and secular slowdown (2007-2009) resulted in a “36.3% drop in the incomes of the top 1% of earners in the Unites States, compared to an 11.6% drop for the remaining 99%” (The End of Power, pg 6).

 

I’m not a boomer. So don’t blame me. Don’t blame my Mom & Dad just because they are Canadian either, eh. Instead, if the Fed hikes “just because it’s time”, you can congratulate Yellen for closing the “inequality gap” – because the pace of asset #deflation will be visceral.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.12-2.50%

SPX 2072-2104
Nikkei 20061-20767
VIX 12.61-15.65
USD 94.01-95.98
YEN 122.61-125.46
Oil (WTI) 57.78-61.80

Gold 1167-1198

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macro's Visceral Edge - Chart of the Day


Off The Lows?

Client Talking Points

EUROPE

They had the DAX and CAC down -5% at 2:00AM ET; now they’re down -3%. The levels obviously matter inasmuch as liquidity does – TREND levels to watch = DAX 11,375, CAC 4980, IBEX 11,199. 

YIELDS

Not “off the lows” for Greek, Italian, Spanish, etc. yields (Italy =25 basis points to 2.39% is finally > UST 10YR of 2.34%), and they’re high-grading with a big bid to UST + German Bunds too (10YR down -18 basis points on the day to 0.74%); this is the 4th time UST 2YR has failed to “breakout” > 0.75%.

S&P

Not “off the lows” for Greek, Italian, Spanish, etc. yields (Italy =25 basis points to 2.39% is finally > UST 10YR of 2.34%), and they’re high-grading with a big bid to UST + German Bunds too (10YR -18 basis points on the day to 0.74%); this is the 4th time UST 2YR has failed to “breakout” > 0.75%.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with special update on Greece.

Asset Allocation

CASH 44% US EQUITIES 6%
INTL EQUITIES 10% COMMODITIES 10%
FIXED INCOME 30% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
PENN

Not “off the lows” for Greek, Italian, Spanish, etc. yields (Italy =25 basis points to 2.39% is finally > UST 10YR of 2.34%), and they’re high-grading with a big bid to UST + German Bunds too (10YR -18 basis points on the day to 0.74%); this is the 4th time UST 2YR has failed to “breakout” > 0.75%.

ITB

Not “off the lows” for Greek, Italian, Spanish, etc. yields (Italy =25 basis points to 2.39% is finally > UST 10YR of 2.34%), and they’re high-grading with a big bid to UST + German Bunds too (10YR -18 basis points on the day to 0.74%); this is the 4th time UST 2YR has failed to “breakout” > 0.75%.

TLT

After a Fed-fueled week of strength in slow-growth, yield-chasing asset classes and long duration fixed income, both the Dollar and interest rates re-couped their losses from Fed Week. The dollar declined, rates increased, and as a result, those long of gold took some pain. Will this continue? Will a long, sustained rate liftoff ensue? We don’t think so. We continue to repeat that the chance of further downward revisions to forward looking growth estimates from the Federal Reserve and consensus macro is much more likely than not. The attempted suspension of economic gravity from policy makers weakens the currency and puts pressure on bond yields. We remain long of this set-up with gold and long-duration fixed income.

Three for the Road

TWEET OF THE DAY

Greek Drama https://app.hedgeye.com/insights/44923-greek-drama-a-hedgeye-contributor-view… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

If you do not expect the unexpected you will not find it, for it is not to be reached by search or trail.

Heraclitus

STAT OF THE DAY

Greece has received the equivalent of 214% of its GDP in aid from the Eurozone, ten times more, relative to gross domestic product, than Germany after the Second World War.


CHART OF THE DAY: Off The Lows? #Broken...

Editor's Note: Below is a brief excerpt and chart from today's morning strategy note written by Hedgeye CEO Keith McCullough. Click here to subscribe and access the whole thing.

 

...Both levels and liquidity will matter most this morning. At 2AM EST, European Equity Futures had both the German DAX and French CAC indices down around -5% - four hours later, they were “off the lows” at -3%.

 

But unless you can contextualize risk (price, volume, volatility) across multiple-durations and cycles, what precisely does down -3% or -5% (or US Equity Futures down 35 or 22 handles) actually mean?

 

CHART OF THE DAY: Off The Lows? #Broken... - zz 06.29.15 chart


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Off The Lows?

***JOIN US LIVE AT 8:30AM ET FOR A SPECIAL GREECE EDITION OF THE MACRO SHOW WITH HEDGEYE CEO KEITH MCCULLOUGH AND EUROPEAN ANALYST MATT HEDRICK. CLICK HERE.

 

“You learn a lot more from the lows because it makes you pay attention to what you are doing.”

-John Elway

 

What are you doing this morning? I assume what you need to do is a function of what you already did. Were you set up for Greece being “saved” again? Or were you taking down your exposure on last week’s European “bounce”?

 

Like any world class athlete, you have to really pay attention to what you are doing when risk is rising. From a cyclical investor’s perspective, that risk typically manifests at the end of a cycle, not the beginning.

 

With China, Europe, and the US slowing (at the same time) into the back half of 2015, you may very well have to get used to the manic media talking about markets being “off the lows” this summer – that’s what happens on the way down.

 

Off The Lows? - z storm

 

Back the Global Macro Grind

 

Both levels and liquidity will matter most this morning. At 2AM EST, European Equity Futures had both the German DAX and French CAC indices down around -5% - four hours later, they were “off the lows” at -3%.

 

But unless you can contextualize risk (price, volume, volatility) across multiple-durations and cycles, what precisely does down -3% or -5% (or US Equity Futures down 35 or 22 handles) actually mean?

 

If your #process is chasing weekly charts and trivial moving monkey averages, would you say that on a week-over-week basis nothing actually happened within the aforementioned % moves?

 

  1. EuroStoxx600 was +2.9% last week
  2. Germany’s DAX was +4.1% last week
  3. Greece was +16.0% last week

 

Or no? As long as the Greeks don’t let their markets (or banks) open, no worries, I guess. Oh, and if you’re one of the poor bastards who doesn’t trade markets and just wants some of his money back, too bad – you get 60 euros, max, per/day.

 

On liquidity, #newsflash: there is none.

 

So that’s a pretty easy risk to contextualize in both equity and fixed income terms. But what about the levels? Are European Equities undergoing what we call a Bullish-to-Bearish TREND Phase Transition?

 

Since A) we have slower-for-longer estimates for real European GDP growth than consensus for 2H of 2015 and B) my risk management signal says this recent 3-month breakdown (TREND duration signals) is real – for now my answer is yes.

 

To review some key European Equity market TREND levels that have broken:

 

  1. German DAX = 11,375
  2. French CAC = 4,780
  3. Spanish IBEX = 11,199

 

Implied by those signals (since I have price, volume, and volatility calculated within each) is RISING VOLUME (on down days) and RISING VOLATILITY in terms of how I measure it within my immediate-term risk range #process.

 

The other obvious thing the manic-financial-media tends to miss when its pundits navel gaze at equity indices being “off the lows” is cross-asset-class risk management correlations and signals.

 

Look at this morning’s move in Global Bond Yields, for example:

 

  1. GERMAN BUNDS: after ramping to lower-highs again last week, 10yr Bund Yields -18bps to 0.74%
  2. ITALIAN BONDS: after making higher-lows (again) last week, 10yr Italian Yields +25bps to 2.39%
  3. US TREASURIES: after making lower-highs (again) last week, UST 10yr Yield -13bps to 2.34%

 

This all came after a horrific week for US Treasuries where the short-end of the curve (2yr Yield) was, allegedly, “breaking out” (for the 4th time since December) but failed, miserably, again at 0.75%, falling back to 0.64% this morning.

 

While last week was a Dollar Up, Rates Up (USD +1.5% on the week vs. the Euro) week, this morning is the ole Dollar Up (small), Rates Down (hard) move that reminds you of the mother of all risks you saw from SEP-JAN. #Deflation

 

Got Debt #Deflation?

 

Greek Bond Yields (10yr) are +346bps this morning to 13.94%. No Sir “growth is back” chart chaser, that is not “off the lows.”

 

I think we’ll all learn a lot from this momentum-chasing-cycle slowing; especially if you didn’t learn anything from the last two US cycle tops (2000 and 2007) or the long-term-secular one that’s driving Europe toward another devaluation.

 

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

 

UST 10yr Yield 2.18-2.48% (bearish)

SPX 2079-2110 (bearish)
DAX 10,5 (bearish)
Nikkei 191 (bullish)
VIX 13.70-16.07 (bullish)
USD 93.96-97.11 (neutral)
EUR/USD 1.10-1.14 (neutral)
YEN 122.25-124.99 (bearish)
Oil (WTI) 57.87-61.13 (neutral)

Nat Gas 2.66-2.89 (neutral)

Gold 1165-1205 (bullish)
Copper 2.57-2.68 (bearish)

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Off The Lows? - zz 06.29.15 chart


June 29, 2015

June 29, 2015 - Slide1

 

BULLISH TRENDS

June 29, 2015 - Slide2

June 29, 2015 - Slide3

June 29, 2015 - Slide4

June 29, 2015 - Slide5

June 29, 2015 - Slide6

 

BEARISH TRENDS

June 29, 2015 - Slide7

June 29, 2015 - Slide8

June 29, 2015 - Slide9

June 29, 2015 - Slide10


Greek Drama: A Hedgeye Contributor View

Editor's Note: We are pleased to present this special Contributor View written by Daniel Lacalle. Mr. Lacalle is an economist, fund manager and author of Life In The Financial Markets (Wiley) and The Energy World Is Flat (Wiley). You can follow him on Twitter at @dlacalle.

 

Greek Drama: A Hedgeye Contributor View - dan1 

 

By Daniel Lacalle

 

You can check out any time you like but you can never leave.” -Hotel California

 

The Greek drama continues to unfold and puts pressure on European markets despite the fact that Draghi´s “monetary laughing gas” continues to pump €60bn per month into the slowly recovering European economy.

 

The call by the ruling party, the communist Syriza, for a referéndum in Greece, is the last episode of a soap opera that´s starting to be sadly comical.

 

For once, Syriza is calling a referéndum on State fiscal policy, something that the Greek constitution specifically forbids. It is simply a measure to try to make citizens forget the atrocious negotiating tactics of their government, who could have reached a benefitial agreement much earlier without putting the country on the verge of a bank run.

 

Additionally, the  government is trying to show to the citizens that the Troika proposals are unacceptable when the difference between the document presented by Syriza and the EU´s suggestions are minimal (0.5% of GDP).

 

The real drama is that none of the measures announced will solve Greece´s real issues. No, it´s not the euro, or the austerity plans. It´s not the cost or maturity of debt. Greece pays less than 2.6% of GDP in interest and has 16.5 years of average maturity in its bonds. In fact, Greece already enjoys much better debt terms than any sovereign re-structuring seen in recent history.

 

Greek Drama: A Hedgeye Contributor View - dan2

 

Greece´s problem is not one of solidarity either. Greece has received the equivalent of 214% of its GDP in aid from the Eurozone, ten times more, relative to gross domestic product, than Germany after the Second World War.

 

Greece´s challenge is and has always been one of competitiveness and bureaucratic impediments to create businesses and jobs.

 

Greece ranks number 81 in the Global  Competitiveness Index, compared to Spain (35), Portugal (36) or Italy (49). In fact it has the levels of competitiveness of Algeria or Iran, not of an OECD country.  On top of that, Greece has one of the worst fiscal systems and limits job creation with a combination of agressive taxation on SMEs and high bureaucracy. Greece ranks among the poorest countries of the OECD in ease of doing business (Doing Business, World Bank) at number 61, well below Spain, Italy or Portugal.

 

Greece´s average annual déficit in the decade before it entered the euro was already 6%, and in the period it still grew significantly below the average of the EU countries and peripheral Europe.

 

Between 1976 and 2012 the number of civil servants multiplied by three while the private sector workforce grew just 25%. This, added to more than 70 loss-making public companies and a government spend to GDP figure that stands at 59%, and has averaged 49% since 2004, is the real Greek drama, and one that will not be solved easily.

 

One thing is sure, the Greek crisis will not finish by raising VAT – impacting consumption – and increasing taxes to businesses, nor making small adjustments to a pension system that remains outdated and miles away from those of other European countries. A new 12% “one-off” tax on companies generating profits of more than 500,000 euro will not help job creation and will likely incentivise more tax fraud.

 

The inefficacy of subsequent Greek governments and Troika proposals is that they never tackle competitiveness and help job creation, they simply dig the hole deeper raising taxes and allowing wasteful spend to go on.

 

From a market perspective the risk is undeniably contained, but not inexistent. Less than 15% of Greek debt is in the hands of private investors. Most of the country´s debt is in the IMF, ECB and EU countries’ hands. The most impacted by a Greek default would be Germany, which holds bonds of the hellenic republic equivalent to 2.4% of its GDP, and Spain, at 2.8% of GDP, small in relative terms.

 

Additionally, the ECB prints “one Greece” every three months.

 

However, the main risk for the Eurozone comes from a prolongued period of no-solutions. Not a Grexit but a “Gredrag,” dragging on for months with half baked attempts to sort the liquidity crisis.

 

This prolongued agony is unlikely to help investors´confidence. And it might raise questions of the possibility of similar illogical behavior from other fringe parties close to Syriza´s views in the Eurozone, particularly in Spain and France. Because behind this all what lies is an ideological agenda, not the best financial deal for the country. Syriza could be looking to do something similar to what Nestor Kirchner did in Argentina in 2005, cut ties with the IMF and agree to alternative financing with Venezuela at double the cost just for ideological reasons.

 

Greece exiting the euro remains a distant possibility, despite the headlines. The much publicised “Russian solution” forgets that Russia is not stupid and doesn´t lend at better terms or with easier conditions – think of Syria and Ukraine.

 

A Grexit would not solve Greece´s challenges, as the country spent decades unsuccesfully trying to solve structural imbalances before joining the euro with competitive devaluations and failed keynesian bets on public spending.

 

Greece doesn´t need to be a failed state. But governments seem to be inclined to prefer a bank-run and capital controls than to reduce unnecessary spending. The fact that Syriza´s first measure was to re-open the public TV network – undoubtedly a “priority” in a debt crisis- shows how little they care about the “social urgency”.

 

Greece should stay in the euro, open its economy to business, attract capital, privatize inefficient public sectors, incentivize high productivity sectors with tax deductions, and reduce wasteful spend, not feed the government machine with ever rising taxes to get a few crumbles left by the survivors of the disaster.

 

If not, in three years time we will be talking of the “Greek crisis” again.

 



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