THE HEDGEYE EDGE
Our bigger picture cycle work helps contextualize the shorter-term asset price moves within their longer-term trends. Having a multi-duration process centered around the rate-of-change in Growth, Inflation, Policy (GIP Model) is a calculated and tested process.
In other words, we have a repeatable, math-driven process that prevents day-to-day market emotions from getting the best of us. That’s the name of the game if you’re a long-term investor looking to protect your wealth and remain sane in this volatile market environment.
Right now, our model flagged the third consecutive quarter of growth slowing to close out Q4 2015. Aside from a modest acceleration in Q1 of 2016, that model has the U.S. economy tracking squarely in QUAD 4 heading into Q2 (growth and inflation decelerating). Long-term Treasuries have repeatedly been the most telling signal of longer-term growth expectations.
INTERMEDIATE TERM (TREND)
Only longer-term investors who have been right on the direction of longer-term growth and inflation have been on the right side of long-term Treasuries, which outperform in a growth slowing environment.
Regardless of various attempts by policymakers to influence currencies and rates, if growth continues to surprise to the downside, the long end of the curve will continue to discount forward looking growth expectations. ZROZ is the most sensitive way to express this view with the discounting of longer-term cash flows.
LONG TERM (TAIL)
Slower for longer on growth has equated to relative outperformance for buy-and-hold investors in long-term sovereign bonds. One of the largest headwinds to our consumption-based economy (~70% of GDP) for the next several years is unfavorable demographic trends. The U.S. economy’s core spending group (35-54 year olds) is projected to contract through 2019. That fits with our big picture calls on U.S. growth slowing and hence lower for longer rates to the benefit of ZROZ.