“Here at our sea-washed, sunset gates shall stand
A mighty woman with a torch, whose flame
Is the imprisoned lightning, and her name
Mother of Exiles” –New Colossus
I’m on the Acela train to Boston this morning and, admittedly, having a hard time thinking about macro markets as the sun rises on the East Coast of Liberty’s Colossus.
The New Colossus is commonly known as the Statue of Liberty poem. It’s a sonnet that was written by Emma Lazarus in 1883. Interestingly, the poem wasn’t placed on the pedestal of the statue until 1903. History often takes time to find her truths.
En francais, on appelle le statue La Liberte Eclairant Le Monde. And whether your mother’s tongue is French like mine’s is this morning or not… no matter what your politics, we should all stand together to defend all that is truth, liberty, and justice in this world this morning.
Back to the Global Macro Grind …
My favorite long-term risk management quote is more of a question really. “What is the truth?” is something Ray Dalio from Bridgewater Associates coined a long-time ago. I like it because it attempts to simplify the complex.
Unlike economic and political ideologies, the rates of change in economies aren’t complex. They are simple sine curves that anyone with an excel spreadsheet can map. They (like the US Federal Reserve is supposed to be) are data dependent.
In our Hedgeye GIP (Growth, Inflation, Policy) model, we focus primarily on trying to probability-weight the prospective change in monetary policy by measuring the rates of change in both growth and inflation, across multiple durations.
Last Friday was an important “data” day as we were able to see the truth on two important growth and inflation scores:
- GROWTH – US Retail Sales slowed (again) from last November’s #ConsumerCycle high of 4.7% to 1.7% y/y
- INFLATION – Producer Price #Deflation hit a new cycle low of -1.6% y/y (year-over-year)
Since US Retailers like Macy’s (M), Nordstrom’s (JWN), and Kohl’s (KSS) had been crashing coming into this #LateCycle consumption data slowing, it was quite bearish to see both those stocks and the US Retail (XRT) sector hit new lows on the “news.”
Neither was it surprising to us that the 6-month crash in inflation expectations continued:
- CRB Commodities Index (19 commodities) lost another -3.3% on the week, taking its 6-month crash to -20.1%
- Copper deflated another -3.5% week-over-week, taking its 6-month crash to -26.1%
- Oil (WTI) got crushed (again) losing another -7.9% on the week, taking its 6-month crash to -35.6%
In other words, if you’ve been buying into the “global growth is bottoming – get long reflation” call for the last 6 months, you didn’t heed Hedgeye’s 18 month old advice, and probably lost whatever hope you had of having a big Q4.
What’s interesting to me isn’t that the Consensus Macro that missed calling for the #Deflation to begin with still thinks you should be long inflation expectations – it’s that they don’t get the link between #Deflation and #GrowthSlowing.
Here’s how this thing called the cycle works:
- Inflation Expectations peak and companies lose both pricing power and cyclical revenue “growth”
- As the corporate profit cycle peaks and slows, companies start firing employees to make “earnings”
- As people make less money and/or get fired, consumer confidence rolls over from its cycle peak
As you can see in today’s Chart of The Day, US Consumer Confidence looks a lot like the US economic and profit cycle. Elevator on the way up, and windows on the way down. Since it’s behavioral, it makes sense – unless you don’t do #behavioral.
If you don’t do history, math, and behavioral – you don’t do macro like we do. And we’d humbly submit that if you don’t do rate of change macro like we do, macro is currently doing you.
While it doesn’t surprise us that the alleged bull market in US stocks still has the Dow, SP500, and Russell 2000 all down for 2015 YTD (as we head into the end of 2015), we do find the level of unawareness on US Equity Style Factor exposures quite low.
From a Style Factor perspective, here were the Worst 3 Things you could have been long both last week (and for the last 6 months):
- Small Cap Stocks (bottom quartile of the SP500) were -5.3% last week and are -13.8% in the last 6 months
- High Short Interest Stocks were -5.4% last week and are -14.2% in the last 6 months
- High Beta Stocks were -5.8% last week and are -14.0% in the last 6 months
In other words, even if your competitors completely missed making the #Deflation and #GrowthSlowing call 6 months ago, they could have learned from those mistakes and not chased the 1-month counter-TREND bounce in October.
But they didn’t learn. And that’s a good thing for those of us who sought the truth as opposed to a preferred compensation outcome.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.15-2.36%
Oil (WTI) 39.96-44.05
Best of luck out there this week and God bless truth and liberty,
Keith R. McCullough
Chief Executive Officer