Editor's Note: The original version inadvertently read "... we added TIP to Investing Ideas on the short side on 6/21." We apologize for the error. Of course, we meant "long side."
THE HEDGEYE EDGE
The Hedgeye Macro proprietary Growth, Inflation, Policy (GIP) model has proven to be an accurate, front-running model for predicting growth and inflation on a go-forward basis. After an epic two years of deflation, the model is signaling that growth continues to slow with inflation picking up into Q3.
We model growth and inflation on a Y/Y trending basis, and CPI readings in the second half of the year will be coming against easy comps. On the other side of that, Q2 and Q3 GDP comps are THE TOUGHEST of the cycle. Taken together, we expect incrementally dovish Fed rhetoric to continue which should support reflation assets.
Treasury Inflation-Protected Securities (TIPS) are a lower volatility way to play reflation with a growth slowing bias embedded in the position.
INTERMEDIATE TERM (TREND)
We signaled buy TIPS in our Real-Time Alerts product on Monday, with US Treasury Bond yields up on "no Brexit" speculation. Our quantitative risk management product is signaling that a short-term step-up in U.S. Treasury yields is just a TRADE, not a TREND, so we will continue to fade any newsy move in yields when the timing is right, according to our signals.
From an intermediate-term perspective, the TREND in long-term Treasury yields remains BEARISH, as real (trending) economic growth continues to slow (hence our months-long TLT position in Investing Ideas).
LONG TERM (TAIL)
Again, we want to be long of growth decelerating and inflation picking up into the back half of 2016 and TIPS are a great way to play both of these views along with our GLD (reflation) and TLT (growth slowing) positions.
To review our global #GrowthSlowing call from a demographic perspective, the working age population continues to decelerate in the U.S., Europe, and Japan while the 65+ year-old age bracket, in the U.S., Europe, Japan, and China, is estimated to accelerate well through 2020. This is a scary picture from a productivity standpoint.
The policy response globally has been, and will continue to be, currency devaluation and monetary easing with the intent to create inflation. Considering these policies have fallen short, we have no doubt that central bankers will continue pushing through inflationary policies with domestic CPI finally accelerating as it comes against easy comps starting in the coming quarters.
ONE-YEAR TRAILING CHART