“Our greatest glory is not in never failing, but in rising up every time we fall.”
-Long Bond Bears
Actually, Ralph Waldo Emerson wrote that. But for this morning’s note I thought I’d borrow it for the Long Bond Bears. They’ve failed since #TheCycle peaked in July of 2015. Despite the perceived glory in “calling the top”, shorting long-term Treasuries because they’re “expensive” has been a costly mistake.
As all long-term cycle investors know, “expensive” gets more expensive as GDP growth slows and asset allocators seek exposures that get them paid during the down-cycle. Put another way, there’s a premium valuation assigned to the return of capital when returns on capital are falling.
One of the most expensive major macro securities in world history (Japanese Government Bonds) hasn’t paid the bears for decades. Despite all the glory of living life as a central planner, their policy to “stimulate growth” with negative rates has failed too.
Back to the Global Macro Grind…
Taking a breather from the battle between #Reflation and #Deflation (in Dollars), last week’s biggest moves in macro were driven by what I think was another head-fake for rates rising:
- US Treasury 2YR Yield popped +13 basis points on the week to 0.88% (still down -17 basis points YTD)
- US Treasury 10YR Yield rose +15 basis points on the week to 1.85% (still down -42 basis points YTD)
- Utilities (XLU) corrected -2.2% on the week to +11.6% YTD
- REITS (MSCI) fell -2.7% on the week to +2.8% YTD
- Consumer Staples (XLP) dropped -2.0% on the week to +3.3% YTD
From a US Equity Style Factor perspective, you can see the impact of Rates Rising last week as well:
- High Yield Stocks lost -0.2% on the week to +2.2% YTD
- Low Yield Stocks gained +1.3% on the week to +0.6% YTD
*Mean Performance of the Top Quartile vs. Bottom Quartile of SP500 companies
In other words, last week provided one of the few major 2016 buying opportunities in what we call a counter-TREND move in rate sensitive macro exposures.
And you thought I wasn’t bullish? I’m super bullish on #GrowthSlowing. There’s always a bull market somewhere!
Another reason not to worry (be happy) if you have Hedgeye’s macro view, is that the crowd still doesn’t agree with us. Here’s what Consensus Macro positioning looks like from a CFTC futures and options perspective:
- SP500 (Index + E-mini) net LONG position of +9,630 contracts = +1.83x 1YR z-score
- Crude Oil net LONG position of +408,569 contracts = +1.93x 1YR z-score
- 10YR Treasury net SHORT position of -131,565 contracts = -2.33x 1YR z-score
For those of you who are new to following us, we measure current macro positioning across multiple durations relative to where the positioning has been in the past. Anything plus or minus 2x tends to be a great contrarian indicator.
While it’s amazing to watch, I still can’t for the life of me believe that consensus is this complacent about US GDP #GrowthSlowing. If you thought GDP was going to be 2-2.5% in Q2, you’d probably chase US Equity Beta and short bonds.
If, however, you have our Wall Street low forecast of sub 1% US GDP for Q2, you’d:
A) Buy Long-term Bonds, Utilities, REITS, and Staples
B) Short High Beta, Small Caps, and Financials
So let’s do more of that this week ahead of #TheCycle growth slowing reports for both Durable Goods (Thursday) and GDP (Friday).
The other not so funny thing that happened on the way to the risk management forum last week was that the US Dollar Index had its 3rd straight up week, closing +0.8% on the US Dollar Index, holding comfortably above long-term TAIL support of 92-93.
As macro tourists were hyperventilating about the prospects of a “rate hike”, the consensus that “Global Demand has bottomed” met its maker in #StrongDollar terms:
- Emerging Market Stocks (MSCI) dropped back into the red for 2016, -1.8% to -1.5% YTD
- Chinese Stocks (Shanghai Comp) were down another -0.1% on the week to -20.1% YTD
- Dr. Copper deflated another -0.9% on the week to -4.3% YTD
Dollar Up, Rates Down? Yep.
That’s what happens when the rate of change of both growth and inflation are slowing. In our GIP (Growth, Inflation, Policy) model, we call it #Quad4. There may be no Old Wall glory in it, but it’s the ultra-bull case for Long Bond Bulls.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.68-1.87%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer