“Cash is an easy way to defeat negative interest rates.”
I don’t know about you, but I value my hard earned cash, big time.
When you think about the implications of the following pattern: #GrowthSlowing => Currency Devaluation (dovish monetary policy response) => and falling and/or negative interest rates … it’s not that hard to understand why you’d be overweight cash, positive absolute return holdings, and safe yielding assets.
In a nutshell, that’s The Bull Case for being long what I am long personally: Cash, Long-term Bonds, Municipal Bonds, Extended Duration Bonds, Utilities, and Gold (+ Real Estate + Hedgeye Equity + NHL Equity, and private stuff!).
Back to the Global Macro Grind…
You see, I’m not in the business of marketing the perma bull on “but it’s cheap.” That mediocre man’s excuse almost always aligns with one very basic reality: being long and wrong something that isn’t going up. I want to own things that get more expensive.
I know this might be way out there in an environment where many consensus portfolios are having a hard time Beating Negative, but when I think about building my personal net wealth I think:
- Don’t lose the money I have
- Try to earn a positive risk-adjusted return on the money I invest
I know. The first thing a reasonably good storytelling high-net worth broker is going to say back to someone like me on something like that is “but inflation is rising, Keith – you need to put your cash to work.”
My reply: growth is slowing faster than inflation is rising. And, in the intermediate to long-term, GROWTH slowing at an accelerating rate, trumps (pardon the pun) inflation rising at a decelerating rate.
That’s why I have a 49% position in Cash and 91% of my max asset allocation in Fixed Income right now. On this week’s redo of “oh, rates are gonna rip” that’s blown Long Bond Bears up for almost a year now, I was able to buy more TLT (on red).
What’s the catalyst for rates to stop rising at the 6th lower-high since I’ve been making this call (July 2015)?
- #TheCycle (economic, profit, and credit cycles all slowing now, at the same time)
- #LateCycle US Consumption Growth slowing from its 1H 2015 cycle peak
- #LateCycle US Employment Growth slowing from its 1H 2015 peak
On that last point (#EmploymentSlowing), while the Old Wall was staring at the trees yesterday (‘omg, omg – what did Dudley say’), we were the only firm to write a research note contextualizing the worst US Jobless Claims report since 2012.
At +2% year-over-year, the latest non-seasonally adjusted (NSA) jobless claims report was the first year-over-year acceleration to positive since 2012. Prior to 2012, you’d have to go back to 2007 to find the last time claims were rising.
Yes, we get it. Initial claims are still at a “low level” (hint: they ALWAYS are at the END of #TheCycle), but RATE of CHANGE is what matters most in macro. Most of our long-standing subscribers (thanking all of you, again, btw) get that.
Here are some more questions to consider when you try seeing the forest instead of the daily trading trees:
- Does #EmploymentSlowing data qualify as the “data” Yellen is dependent on?
- Do the 2 worst (April NFP and this week’s claims) employment reports SINCE the Fed Minutes matter?
- In addition to employment, isn’t the Fed more SP500 Dependent than they are concerned about inflation?
On SPY Dependence, I highly suggest you don’t forget that the recent Fed Minutes (that consensus macro tourists are hyperventilating about) came before the SP500 dropped for 4 straight weeks (intraday yesterday was a 4 week low).
Perversely, this is why I’m at my most “invested” position of 2016. Basically, because I am so bullish on #GrowthSlowing I believe the Fed is going to have to agree with Hedgeye on that (again) by the time they waive their magical market wand in June.
No, that doesn’t mean I am buying #LateCycle S&P Sectors like Consumer Discretionary, Tech, and Financials. It means I bought more of A) what’s been working and B) what worked yesterday. In a down tape, my “expensive” Utilities (XLU) closed +1.0% at +11.3% YTD.
On the Cash position, my friend Jim Rickards does a good job explaining why people like me still like it:
“There are many good, legitimate reasons to hold cash. You might have a cash business. You might want to have cash for emergencies. If you live where I do, on the East Coast, we’re vulnerable to hurricanes and nor’easters that can knock out power for days or weeks…” (The New Bull Case For Gold, pg 141)
Unlike many people I compete with in giving you risk managed advice, I have a cash business where I personally back the firm’s line of credit. I have to meet payroll for 70 employees, bi-monthly. And I will not get bailed out if I slow and/or fail.
Unlike running a central bank, that’s the real world of running a business. I deal with cash-in vs. cash-out. And if I don’t beat a negative return on my invested capital, I will go away.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.68-1.88%
Oil (WTI) 44.82-50.43
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer