Debt Deflation Knives

“Second prize is a set of steak knives.”

-Alec Baldwin

 

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).

 

Debt Deflation Knives - z ab stk

 

“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):

 

  1. Commodities (CRB Index) down another -4.4% wk-over-wk = down -8.5% month-over-month
  2. Oil (WTI) down another -6.0% week-over-week = crashing -20.5% month-over-month
  3. Gold down another -2.1% week-over-week = down -7.6% month-over-month
  4. Copper down another -4.5% week-over-week = down -9.2% month-over-month
  5. Canadian Dollar (vs. USD) -0.6% week-over-week = down -5.1% month-over-month
  6. 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:

 

  1. Russian Ruble -2.5% week-over-week = -down 6.8% month-over-month
  2. Russian Stocks -5.8% week-over-week = down -8.9% month-over-month
  3. Brazil’s Real -4.9% week-over-week = down -7.6% month-over-month
  4. Brazilian Stocks -5.9% week-over-week = down -8.5% month-over-month
  5. Nickel -1.8% week-over-week = down -11.6% month-over-month
  6. 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:

 

  1. Inflation expectations (5yr breakevens) dropped another -13bps = down -28 bps in the last month (1.42%)
  2. Energy (XLE) and Basic Material (XLB) stocks down -4.0% and -5.4% (-9.1-9.3% in the last month) respectively
  3. 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):

 

  1. LEVERAGE: High Debt (to Enterprise Value) stocks were down -3.3% last week and are down -7.0% in the last 3 months
  2. 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%

SPX 2069-2098
RUT 1
Nikkei 202
VIX 12.53-14.58
USD 96.61-98.35
Oil (WTI) 47.07-50.49

Gold 1067-1117

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Debt Deflation Knives - Z 07.27.15 chart


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