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CHART OF THE DAY: The Supremely Long-Term Tail Risk Wagging The Economic Dog

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... Since the Supremely Long-Term TAIL risk wagging the economic dog here remains a demographic (aging – see Chart of The Day) one, I’m most impressed with long-term investor returns that have nailed that. Slower (growth) for longer has equated to supreme alpha for buy-and-hold investors in long-term sovereign bonds."

 

CHART OF THE DAY: The Supremely Long-Term Tail Risk Wagging The Economic Dog - 03.14.16 Chart


Supremely Long-Term

“Rebalancing represents supremely rational behavior.”

-David Swensen

 

In reviewing my old college economic-cycle-top notes (there have been 3 since I graduated = 1999, 2007, and 2015), I came across this one from Yale Endowment chief asset allocator, David Swensen.

 

While I don’t think anyone is “supremely rational” when it comes to investing at economic cycle tops and bottoms, I do find it interesting to observe human behavior as the signs of topping (and bottoming) processes become more obvious.

 

Swensen wrote that in the year 2000 stating that “disciplined rebalancers need to sell what’s hot and buy what’s not.” If you have a supremely long-term investment horizon, that’s probably going to work more often than it doesn’t. If you’re like > 90% of money managers out there today, chasing monthly and quarterly returns – not so much.

 

Back to the Global Macro Grind

 

If you’ve been rebalancing into anything related to the Federal Reserve’s 2008-2012 (US Dollar all-time lows 2011) Commodity Bubble, you’ve had quite the headache for the last 3 years.

Supremely Long-Term - Deflation cartoon 12.17.2015

 

If you just started buying them in 2016, you’re feeling like you might have called the bottom. If you were long commodities vs. short Long-term Treasuries, you’ve had a rough year – but you killed it last week!

 

I obviously got killed last week. It happens and it sucks. While I’ve been much more bearish on both rates and the Financials (XLF) in 2016 than I have been on commodities and/or their related equities, the only thing that really worked for me last week was long Utilities (XLU). While the “YTD” is pretty short-term in the context of Swensen’s time-horizon, the YTD score still matters:

 

  1. US Dollar -1.2% on the week to -2.5% YTD
  2. Euro (vs. USD) +1.3% on the week to +2.7% YTD
  3. Canadian Dollar (vs. USD) +0.7% on the week to +4.6% YTD
  4. Commodities (CRB Index) +3.0% on the week to -1.5% YTD
  5. Oil (WTI) +7.3% on the week to -1.5% YTD
  6. Gold -1.5% on the week to +17.9% YTD
  7. SP500 +1.1% on the week to -1.1% YTD
  8. EuroStoxx600 +0.1% on the week to -6.4% YTD
  9. Canadian Stock Market (TSE) +2.3% on the week to +3.9% YTD
  10. US Treasury (10yr) Yield +10 basis points on the week to -29 basis points YTD

 

In other words, the closer you were (last week) to being long what hasn’t worked for 3 years, the better you’d have done. That’s why longer-term investors who have been right on longer-term growth and inflation expectations had a supremely bad week!

 

What is a “longer-term investor”?

 

  1. Someone who just buys, averages down, and holds, forever?
  2. Someone who gets the longer-term fundamentals right?
  3. Or neither? (I’m not marketing a fund here, so happy to consider other definitions)

 

Since the Supremely Long-Term TAIL risk wagging the economic dog here remains a demographic (aging – see Chart of The Day) one, I’m most impressed with long-term investor returns that have nailed that. Slower (growth) for longer has equated to supreme alpha for buy-and-hold investors in long-term sovereign bonds.

 

Great Keith – you still sucked last week.

 

Yep. And I’ll suck even more this week if I’m wrong on the economic cycle. But that’s been my “catalyst” since telling you to “rebalance” out of Small Cap, High Leverage, High Beta stocks, 8 months ago.

 

That’s right. Tell your boss (in my case, my wife) that there’s a guy in Stamford, CT whose research team keeps reiterating that the catalyst to be long:

 

  1. Long-term US Treasuries (TLT) = +5.6% YTD (ex the yield)
  2. Utilities (XLU) = +11.3% YTD (ex the yield)
  3. Gold (GLD) = +17.9% YTD (there is no yield!)

 

Has been, and continues to be, The Cycle.

 

Especially on #LateCycle consumption, employment, and profit metrics (isn’t it sad that Consensus Macro isn’t talking about those?), we’re actually at the YTD lows (see SP500 Earnings, Pending Home Sales, and ISM Services for details).

 

But, but, but…

 

On cyclical stuff that has been crashing for 1-3 years, we’re “off the lows”, bros! And the Fed is going to be hawkish about that on Wednesday because:

 

  1. Deflation In Commodities has had another short-term “reflation” (isn’t that “transitory” btw?)
  2. Late Cycle Employment reports (while slowing in rate of change terms) are still “good”

 

So, they’ll stay tight into an economic slow-down (like they did in raising rates in December). Wouldn’t it be a shocker if the US Dollar goes up on that this week and that we go back to what’s been right since July (selling all reflation rallies)?

 

I know. That’s supremely short-term. Hopefully my sucking wind is too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.75-1.99%

SPX 1
RUT 1036-1099
USD 95.83-97.38
Oil (WTI) 32.21-39.92

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Supremely Long-Term - 03.14.16 Chart


The Macro Show Replay | March 14, 2016

CLICK HERE to access the associated slides.

An audio-only replay is available here.

 

 


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REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.

 

Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)

 

Enjoy!   

 

 

1. McCullough: The Beginning of the End (3/10/2016)

 

 

In this excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough discusses the latest “Viagra” monetary policy moment, and why central planners’ days are numbered.

  

2. Washington on Wall Street: The Very Real Possibility Of A Contested GOP Convention (3/9/2016)

 

 

Following Tuesday’s presidential primary contests, Hedgeye Director of Research Daryl Jones walks through the key takeaways, including the historical context around previous contested conventions and potential stock market implications.

 

3. Why We’re Keeping a Close Eye on Wynn (3/9/2016)

 

 

In this brief excerpt from The Macro Show this morning, Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan distills what’s going on with Wynn Resorts (WYNN) right now, why it matters to Macau, and what to expect going forward.

 

4. Howe: The Biggest Change In Immigration Since The Great Recession (3/9/2016)

 

 

In this excerpt from a recent institutional presentation, Hedgeye Demography Sector Head Neil Howe explains why the fertility rate is the biggest leading indicator of immigration trends.

 

5. An Update On Retail Earnings: 'This Is Not Just Weather' (3/8/2016)

 

 

In this brief excerpt from The Macro Show earlier today, Hedgeye Retail analyst Alec Richards discusses earnings in the sector and why "every single company, with the exception of three, have guided down" this quarter.

 

6. Howe: ‘Trump Will Run To The Left Of Clinton’ (3/11/2016)

 

Click here to watch. 

REPLAY! This Week On HedgeyeTV - HETV macroshow thumb howe f 

 

Hedgeye's Demography Sector Head Neil Howe made a bold prediction on today's edition of The Macro Show. According to Howe, in the general election, Donald Trump will pivot to the left of Hillary Clinton to scoop up the Bernie Sanders crowd.


This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)

 

1. The Big Bang Theory (3/11/2016)

This Week In Hedgeye Cartoons - ECB cartoon 03.11.2016

 

"Our #BigBangTheory remains a very relevant market risk," Hedgeye CEO Keith McCullough wrote this week. "My theory goes that central market planners (BOJ, ECB, Fed, etc.) lose the #BeliefSystem of the market place - instead of currencies going down when they attempt to ease and devalue, they go up (and stocks go down). This just happened in both Japan and Europe."

 

2. Off To See The Wizard (3/10/2016)

This Week In Hedgeye Cartoons - ECB cartoon 03.10.2016

 

ECB head Mario Draghi pulled out all the stops today but macro markets weren't buying it. "The Central Planning Belief System is breaking down," Hedgeye CEO Keith McCullough wrote. "This is the beginning of the end." 

 

3. Out Of Ammo (3/9/2016)

This Week In Hedgeye Cartoons - Draghi cartoon 03.09.2016

 

ECB head Mario Draghi will attempt to quell uneasy macro markets tomorrow. Will he pull the trigger on more easing? Will it matter?

 

4. Goldilocks & The Three Bears (3/8/2016)

This Week In Hedgeye Cartoons - three bears cartoon 03.08.2016

 

The risks looming over macro markets are getting downright depressing.

 

5. JAWS (3/7/2016)

This Week In Hedgeye Cartoons - deflation cartoon 03.07.2016

 

Deflation is stalking Europe.


The Week Ahead

The Economic Data calendar for the week of the 14th of March through the 18th of March is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.

 

CLICK IMAGE TO ENLARGE.

The Week Ahead - 03.11.16 Week Ahead


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