“Second prize is a set of steak knives.”
That, of course, was one of the best one-liners from the 1992 classic Chicago real-estate brokerage movie, Glengarry Glen Ross (which was based on a 1984 Pulitzer Prize winning book by David Mamet).
Baldwin played Blake and the aforementioned quote came during his epic “motivational” speech to the sales-force. As many of you economic-cycle fans will recall, it’s always toughest to create sales and demand, when growth is slowing (1 was no different).
“So,” it’s probably not different this time. The cover of The (now for sale) Economist is trumpeting “The Empire of The Geeks” (Silicon Valley) at another #bubble peak for “growth” assets. Instead, they should be asking themselves if this is a 1999 or 2007 cyclical slow-down.
Back to the Global Macro Grind …
When the cycle slows, those who rotate out of #LateCycle styles of investing like:
A) Inflation expectations
B) Cyclicals (think peak growth and margin expectations)
Get 1st place… and those who are long:
A) “Reflation” (commodities, currencies, and countries linked to inflation expectations)
B) “Global Growth is back” (energy, basic materials, industrials, etc.)
Get to own the falling steak knives…
Here’s how that marked-to-market Global Macro score looked last week (in the context of the last month):
- Commodities (CRB Index) down another -4.4% wk-over-wk = down -8.5% month-over-month
- Oil (WTI) down another -6.0% week-over-week = crashing -20.5% month-over-month
- Gold down another -2.1% week-over-week = down -7.6% month-over-month
- Copper down another -4.5% week-over-week = down -9.2% month-over-month
- Canadian Dollar (vs. USD) -0.6% week-over-week = down -5.1% month-over-month
- Canadian Stocks (TSX Composite) -3.1% wk-over-wk = down -5.1% in the last month
Blame Canada? Nah. In US Dollars, let’s keep going on these hot-commodity-currency-country-links to inflation expectations:
- Russian Ruble -2.5% week-over-week = -down 6.8% month-over-month
- Russian Stocks -5.8% week-over-week = down -8.9% month-over-month
- Brazil’s Real -4.9% week-over-week = down -7.6% month-over-month
- Brazilian Stocks -5.9% week-over-week = down -8.5% month-over-month
- Nickel -1.8% week-over-week = down -11.6% month-over-month
- Rubber -2.2% week-over-week = down -14.0% month-over-month
Nickel and Rubber? Two of the BRIC’s (Brazil, Russia, India, China)? Damn those people who have to sell things in #deflating prices and/or have to buy/consume things in devalued currencies. #Deflation during a global growth slowdown has to be bullish, right?
Right. Right. Steak knives for everyone with a “diversified” asset allocation pie-chart last week! The Latin American “emerging markets” (MSCI) Index was -7% last week (-11.2% in the last month), and Chinese stocks were -8.5%, overnight. Booyah!
Uh, maybe we should be long, “decoupling”? Nope. We’ll stick with the #Quad4 asset allocations, which should have you long low-beta and yield chasing sectors (short Commodities). Currently I like Healthcare (XLV), REITS (VNQ), and Utilities (XLU); not the following:
- Inflation expectations (5yr breakevens) dropped another -13bps = down -28 bps in the last month (1.42%)
- Energy (XLE) and Basic Material (XLB) stocks down -4.0% and -5.4% (-9.1-9.3% in the last month) respectively
- Industrial stocks (XLI) deflated another -3.7% to -6.5% YTD (down -4.5% month-over-month)
If you’re levered long to inflation expectations another way to look at your risk is from a Style Factor perspective (mean performance of the Top Quartile vs. Bottom Quartile in S&P 500 companies):
- LEVERAGE: High Debt (to Enterprise Value) stocks were down -3.3% last week and are down -7.0% in the last 3 months
- BIG BETA: High Beta stocks dropped -4.2% last week and are down -8.7% in the last 3 months
In other news, our long-standing (back to the beginning of 2014 when TLT was at $108) best way to be positioned for growth and inflation slowing (Long-term Treasuries) had a great week last week.
The yield on a 10yr US Treasury Bond is down to 2.25% this morning and I still think that 1.75% happens before 2.75% does. I also love being long Low-Beta vs. short things that are highly levered to falling #DebtDeflation knives.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.21-2.34%
Oil (WTI) 47.07-50.49
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer