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“Space by itself, and time by itself, are doomed to fade away into the mere shadows, and only a kind of union of the two will preserve independent reality.”

-Albert Einstein

I like to use short quotes – because, in this day and age, people tend to have a short attention span. I’m one of those people. Most of us all are. It’s ok, really – to talk and write about our human issues. Most of us have them.

I’m using a longer-form quote this morning because, if you read it slowly, you’ll find the essence of our macro forecasting #process. Instead of time and space, substitute growth and inflation – and you’ll get the rate of change point on policy.

Rate of change with a dynamic/accurate forecast - that’s all we’re using to front-run the Fed. We don’t need inside information. It’s all there, in the data. Growth and inflation slowing. The Fed eventually sees this reality, but on a lag.

Fed Fades - No rate hike cartoon 09.17.205

NOTE: Join Keith LIVE this morning on The Macro Show. Joining him will be a special guest ... maverick Energy/MLP analyst Kevin Kaiser. Click here for access.

Back to the Global Macro Grind

I watched the Fed presser from my wife’s room in the hospital. That was a first. The perspective of the moment gave me tremendous pause. After being incredibly blessed with the gift of our 4th child (Reese McCullough), I could actually think.

And I wasn’t thinking so much about why the Fed didn’t raise rates. Unless your investment process lives in a Newtonian framework (where time and space are constant), you get what we have been explaining (via the data) all year long:

  1. GROWTH: is #LateCycle and will be slower (again) in Q3 than it was in Q2
  2. INFLATION: misreported, yes – in the area code of the Fed’s 2% “target”, no

I was actually thinking about what I never would have thought a child born into a life in America would have to endure: un-elected-central-planners and bureaucrats determining not only the purchasing power of The People, but market direction.

While moneys may be “cheap”, these markets aren’t “free.” Are they politicized? Yes. But, much more importantly, they are hostage to the most un-American ideal of all – mediocrity.

Why, in a country where immigrants like me are pursuing the American dream, has one of the beacons of capitalism (the US stock market) been drowned by mediocre analysis and forecasting? What happened to the pursuit of excellence?

I digress…

I know the establishment doesn’t want me to inspire change or give them a speech. There’s no compensation scheme for them in that. Back to what most people want – what to do with this mess of market forecasts and expectations?

  1. GROWTH – the Fed is going to be wrong on 2H forecasts (again), but just cut their 2016 GDP to a range of 2.2-2.6%
  2. INFLATION – the Fed’s PCE forecast of 0.3-0.5% for 2015 implies no rate hike in DEC

No hike in DEC?

This isn’t that complicated. Get the forecast right, and you’ll get the Fed’s next move right. Not only is Yellen’s 2016 GDP estimate still way too high, but she said, point blank, that the Fed won’t raise until “inflation is at 2%.”

You realize that you’d need to see Oil reflate back to something > $75/barrel to get anywhere close to that PCE inflation number, right? Ed, is that the next bull market catalyst? Higher gas prices and higher-all-time-highs in US rents?

It’s a good thing that through Policies to Inflate asset prices via Down Dollar, that Yellen says the Fed has had no impact on inequality in America. What would the all-time highs in the #1 cost of living (shelter) have to do with it?

Markets re-priced those assets (rate sensitive ones)  in a hurry yesterday:

  1. Housing UP
  2. Utilities UP

Bonds (and any stock that looks like a slow-growth Yield Chasing bond) straight up, as 2-year Treasury Yields crashed in a few hours of trading (dropping from 0.83% to 0.66%, in yield terms). Oh, and our new long Gold position? Up too!

I think the Fed calls that “price stability”, or was it “transitory”?

What’s also transitory is this thing called the economic cycle. And since US employment, wage growth, and consumer confidence, have all already put in their #LateCycle peaks, what’s next is trivial. More slowing, in rate of change terms.

So give this thing some time and space and ask yourself what the Federal Reserve is going to do in December when GDP, at best, has a 1% in front of it. It could easily have a 0% in front of it for Q3. That’s when the Fed will fade, again.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.12-2.24% (bearish)

USD 94.11-95.69

Gold 1099-1145

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Fed Fades - zz chart day 09.18.15 chart2