Dovish Pig Hike

“It takes courage to be a pig.”

-Stan Druckenmiller


That’s one of the best money manager one-liners of all-time. It probably makes the linear-econ-academic types cringe. I like that too. Per a more polite economist, Lasse Heje Pedersen, in Efficiently Inefficient:


“Others go for a more diversified and risk managed approach, arguing instead that bulls get rich. Bears get rich. But pigs get slaughtered.” In his interview with George Soros (Druckenmiller’s former partner), Soros “explained that he too puts significant emphasis on risk management but he feels that one should go for the jugular in rare cases…” (Pedersen, pg 12)


If the Federal Reserve was running a hedge fund, and they’re so convicted in the idea that #Deflation is “transitory” and the US economy isn’t slowing, why not go for the jugular tomorrow and raise rates by 50 basis points?


Dovish Pig Hike - deflation 500 pound gorilla

Click here to join Hedgeye CEO Keith McCullough live on The Macro Show at 9am. 


Back to the Global Macro Grind


Are you kidding me – 50 beeps? “How about an 1/8th of a point, Keith?” Or “what if the Fed raises by 25 beeps and signals they could start cutting rates after that?” Or “what if they don’t raise at all?”


That’s my inbox.


Post the Russell 2000 falling to -7.5% YTD (and -13.9% since July) yesterday, not one email (and believe me, I get a ton of them) is asking me about the upside in rate policy right now. They already tried the Ex-Energy, Ex-Credit, Ex-2000 Stocks thing. And it didn’t work. So, finally, for the 1st time this year… (drumroll)… every question is about the downside.


So, wouldn’t a Dovish Pig Hike be bullish?


Bullish – you know, as in ramp the “reflation” trade one more time into “year-end” baby! If Janet just goes back to what she really is (The Mother of All Doves), why can’t we have a Santa Rally? Why not? Pretty please. Do it for the kids!


After risk managing the last 2 US economic cycle tops:


  1. 1
  2. 2007-2008


I have no doubt in my mind that the Old Wall can drum up a new narrative on why US stocks can never go down. If you follow this morning’s macro message in the US Equity futures, it goes something like this:


  1. Dollar Down on a Dovish Hike
  2. Oil up another +0.5% “off the lows” (post a +1.8% bounce yesterday)
  3. Higher Gas Prices To Stimulate the US Consumer


Oh stop, Keith. Ok. I will. Because the storytelling at this point has reached the level of one of these (fictional) "Choose Your Own Adventure" books I used to read as a kid. “If you’d like to call rate hikes bullish, go to page 67 – if you’d like to call a rate-hike-reversal to dovish, go back to page 12.”


This, of course, will be the 1st time the Fed raises rates into Corporate Profits #Slowing (math people: rate of change) since 1967. And while the punditry on “it’s only 25 beeps” was loud in October, most of that complacency has turned into economic concern.


On the intimate relationship the profit cycle has with the economic cycle, my friend (former JP Morgan Strategist) Doug Cliggott wrote to me last week that we got “bad, bad data this week”:


“Profits of non-financial corporations were down -5% vs. Q3.2014, and their debts were up +7% vs. Q3.2014.  This 1200 bps gap between debt growth and profit growth is the widest we have seen since 2007.  As we talked about in September -- bad things tend to happen when debt growth is a lot faster than earnings.


The Fed data also show a violent {75%} slowdown in Q3 net share buybacks. That no doubt played a central role in the equity downdraft during Q3 ... a huge buyer went away.


My guess is this is a central theme for 2016 -- contracting corporate profits and much weaker cash flows mean very low share buyback volumes compared with the past four or five years. So U.S. equities will be "missing" a big buyer with no obvious, or less-than-obvious, cast of characters standing in the wings to step in and take their place.”


By the “data”, Doug was referring to the Q3 2015 Flow of Funds data (i.e. the Fed’s data!).


While it’ll take courage to do the Dovish Pig Hike thing tomorrow (i.e. the most dovish rate hike in US history), don’t doubt that Yellen will opt for that. All the while, keep on doubting that central planners can’t bend and smooth economic gravity anyway.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.13-2.33%

SPX 2003-2048
RUT 1101--1154

VIX 18.71-24.86
USD 96.60-99.64
Oil (WTI) 34.05-38.15


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Dovish Pig Hike - 12.15.15 EL chart

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