“You’ve got to love what you are doing.”
On behalf of everyone @Hedgeye, I’d like to express our deepest sympathies to the families who have been affected by this horrible shooting in Orlando over the weekend. Sadly, terror is the dark side of how a small percentage of people think about life.
The good news is that there is much more light in the world than there is darkness. While the hockey world lost one of the greatest ambassadors of the game this weekend, the farm boy from Floral, Saskatchewan left us all feeling a lot of love.
Do you love what you are doing this morning? I do. And if you can find that passion on a frozen pond or at your desk, do more and more of that. As Gordie Howe went on to say, “if you love it, you can overcome any handicap… and continue to play for a long time.”
Back to the Global Macro Grind…
In addition to enjoying time with my family and friends, I spent this weekend doing the other thing I love – coaching kids hockey. We were up at the Coast To Coast tournament in Bloomington, Minnesota. Hockey is a hard game, but wow is it easy to love.
I don’t love that US growth is slowing. But I do love the game within the game of being the best independent research firm we can be in making a call that was both differentiated and right.
As everyone in this game knows, the direction of long-term bond yields reflect intermediate-to-long-term growth expectations, and they have been falling alongside those slower-for-longer expectations for … well, a long time.
Dollar Up, Rates Down? Yep. That Quad4 #DeflationRisk showed up again last week:
- USD Index +0.6% on the week > long-term Hedgeye TAIL support of 92.57
- UST 2yr Yield down another -4 basis points on the week to 0.73% (down -32 bps YTD)
- UST 10yr Yield down another 6 basis points on the week to 1.64% (down -63 bps YTD)
And so did cross asset class volatility:
- US Equity Volatility (front month VIX) ramped +26.4% on the week to 17.02
- Oil Volatility (front month OVX) popped +14.8% on the week to 39.95
Since it’s critical to contextualize short-term moves within long-term mean reversion risks, it’s critical to understand what’s been driving this on/off volatility switch all along: Fed growth, inflation, and policy forecasts vs. market expectations.
If stock, commodity, and bond markets weren’t expecting the Fed’s forecast to “probably” raise rates (i.e. another policy mistake, tightening into a slow-down) to be wrong, why would they be driving long-term US interest rates to all-time lows?
Don’t forget that long-term cross-asset class volatility put in an all-time low in the summer of 2014. Corporate profits peaked in the 2nd half of 2014. Some corporates then issued reams of debt expecting their profits to be perpetual. That’s a big problem now.
Especially if you issued debt in Dollars… and don’t get paid in Dollars…
The combination of a rising Dollar and falling interest rates is also very bearish for banks who issued those debts. All-time lows in bond yields are going to crush bank earnings. If you think “earnings have bottomed”, you better state them “Ex-Financials!”
If you’re long things that are crushing it when growth slows (and bond yields fall), congrats:
- Utilities (XLU) added another +1.0% absolute return last week taking them to +16.8% YTD
- Gold rose another +2.8% last week to +20.2% YTD
On the other side of that, classic #LateCycle consumption Sector Styles in the USA lagged:
- Financials (XLF) lost another -1.5% on the week to -2.8% YTD
- Consumer Discretionary (XLY) fell back into the red last week, closing -0.8% to -0.8% YTD
Those two sectors and the Nasdaq (also late cycle) are the last places I want people to have their hard earned money right now. If you get #GrowthSlowing, your main debate should be whether to be long REFLATION or DEFLATION. They are different things.
Yes, it’s been hard to maintain a bearish view on both Global and US growth and not chase the bear market bounce in something that’s killed people (in real return terms) like Energy Stocks.
Yes, it’ll also be hard not to buy Energy Stocks (XLE +11.7% YTD) on the next pullback to immediate-term TRADE oversold as my expectation is that the Fed does everything it can do to devalue the Dollar to another higher-low.
Both this game and life are hard – that’s why they’re easy to love too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.60-1.75%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer