The Fed's Pace

“Adopt the pace of nature; her secret is patience.”

-Ralph Waldo Emerson


Admittedly, there is a confirmation bias in my rate of change driven #process. I’m a big believer in gravity. Cycles take time to play out. We need to dynamically adapt to their pace and be patient.


This Federal Reserve isn’t the one we got used to with Bernanke. Janet’s secret isn’t trying to shape the data to a +3% “growth” outcomes – hers is much more “data dependent.” She’s patient.


Yesterday’s Fed statement had a wiggle. It adjusted (just a bit, but on the margin is what matters) for the recent marked-to-market change in inflation. Very few at the Fed want to raise rates as nature’s pace of #deflation is accelerating.


The Fed's Pace - Deflation cartoon 02.24.2015


Back to the Global Macro Grind


“So” as many like to say, if we’ve already solved for inflation looking a heck of a lot more like #deflation, what we really need to solve for is growth; specifically the pace of growth in the US labor market.


And… as you can see in today’s Chart of the Day, the “pace” (which most of you who are mathematically inclined might agree should be defined as the rate of change) of “gains” in US Non-Farm Payrolls has been slowing since February.


Therefore the most patient investor does nothing on today’s “good” Q2 GDP report and waits for not only the Q3 economic data, but the next 3-6 jobs reports. With “reflation” crashing, we’re only one bad jobs report away from Janet bailing on hikes.


Moving along to the European “data” this morning:


  1. Spain’s headline “inflation” (CPI) reading came in at 0.0% y/y for July (vs. 0.1% in June)
  2. Belgium’s CPI slowed to 0.46% y/y in July (vs. 0.63% in June)
  3. Greece and Austria printed deflationary PPIs (producer prices) of -5.7% and -1.0% y/y, respectively


I know. Damn the “data.” Eventually a mean reverting diffusion index like the PMI will stop going down and everything will be fine, eh?


Reality is that Draghi was as unsuccessful at slowing the pace of nature as Bernanke ultimately was. The lesson from this grand central planning experiment is this:


You can print, devalue, and obfuscate until enough people get sucked into the illusion of growth (commonly known as inflation)  - but then, from those artificially inflated asset prices, all you have left is #deflation.


What to do with all of this?


  1. Stay long US Dollars (UUP) until the Fed starts getting bad jobs reports and hints at Qe4
  2. Stay net short or out of anything commodity “reflation”
  3. Stay with long-duration ways to be bullish on growth and inflation slowing (long-term Bonds and their proxies)


And, in equity markets you like (which hopefully have nothing to do with inflation expectations and/or their commodity-links), I have another huge confirmation bias that seems to be working: buy low, sell high.


On that score, after 5 straight down days (tagging the low-end of my immediate-term risk range) the beloved SP500 was up for 2 days, to lower-highs. “So” you can start selling everything “reflation” and “global growth” again.


Heck, even the almighty Facebook (FB) talked about year-over-year revenue growth “slowing” last night. Those of you who “love the company” but have been patient enough to buy something like that on down days will be rewarded by nature today.


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


UST 10yr Yield 2.21-2.39% (bearish)

SPX 2065-2123 (bearish)
RUT 1 (bearish)
DAX 105 (bearish)

VIX 11.88-15.15 (bullish)
USD 96.43-98.44 (bullish)
EUR/USD 1.07-1.10 (bearish)
YEN 123.18-124.79 (bearish)
Oil (WTI) 46.43-49.05 (bearish)

Nat Gas 2.75-2.92 (bearish)

Gold 1065-1101 (bearish)
Copper 2.31-2.51 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Fed's Pace - Z NFP CoD

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