McCullough: The Biggest of Motherload Risk

Takeaway: We stuck with the growth and inflation call and we didn’t back off.

Editor’s Note: The commentary below comes from remarks delivered on The Macro Show this past Monday by Hedgeye CEO Keith McCullough. Click here to learn more about how you can subscribe to The Macro Show.

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McCullough: The Biggest of Motherload Risk  - Deflation cartoon 02.24.2015

Don’t forget that only a month or so ago, people were talking about 2.75% on the 10-year bond yield in the US and saying the Fed was going to go ahead and raise rates just because “they should.”

Not so much.

We’re down to 2.25% this morning. And falling. Last week was a fantastic week to be long what we call Quad 4 deflation. Don’t forget that in the Quad 4 deflation, you can get rid of all the things that I outlined in the Early Look this morning—whether you’re long energy stocks, basis material stocks, industrial stocks… Industrials! God, down -6.5% YTD. The almighty Dow naval gazer, Dow Jones, down on the year. That’s a strange bedfellow to a bull market if you ask me.

McCullough: The Biggest of Motherload Risk  - Z 07.27.15 chart

If you look at what worked last week, it was actually utilities. It was the bond market positioning on the long end of the curve. REITS were okay on a relative basis.

So again, this is Quad 4. Classic Quad 4 behavior of markets pricing in deflation. It remains the biggest of mother-load risk out there.

Look at the 10-year bond yields, it’s not just in the US:

• Swiss Bond yields are all the way down to -9 BPS this morning – that is implicitly and explicitly imputing deflation.

• German Bund yields down sub-70 at .69.

These are very big moves in the bond market.

And so I ask all my friends that I had to answer to just a couple months ago:

Where are you now?

Come on out here!

Let’s have a debate!

We were standing on the front line. We didn’t go away. We stuck with the growth and inflation call and we didn’t back off. We were wrong for a couple months, but we did not back off no, no, no!

So here I am… Come on out, come on out. Buy side or sell side. I am ready for debate. 

Is growth and inflation slowing or accelerating? You know the answer to that question. That’s why you have an asset allocation that’s over indexed to the best way to express that:  long dated Treasury maturities.