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CHART OF THE DAY: The March To All-Time Lows In Sovereign Yields

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more. 

 

"... Whereas, both Long-term Sovereign Bonds and their equity market proxies did the following:

  1. US Treasury 10-year Yield dropped another -12 basis points on the week to 1.44% (down -83bps YTD)
  2. UK 10-year Yield crashed another -22 basis points on the week to 0.86% (down -110bps YTD)
  3. Germany’s 10yr Yield dropped back to negative, falling -8bps on the week to -0.13% (down -76bps YTD)
  4. Japan’s 10yr Yield fell another -8 basis points on the week to -0.25% (down -52bps YTD)
  5. Low Beta US Equities ramped another +3.7% on the week to +14.0% YTD
  6. High Yield US Equities added another +3.1% on the week to +7.4% YTD
  7. MSCI REITS Equity Index rose another +4.3% on the week to +11.5% YTD
  8. US listed Utilities (XLU) added another +3.7% on the week to +21.3% YTD

*for 5 and 6, that’s the mean performance of Top Quintile vs. Bottom Quintile SP500 Companies"

 

CHART OF THE DAY: The March To All-Time Lows In Sovereign Yields - 07.05.16 Chart


Do We Understand?

“We didn’t understand scientifically why glass is transparent until the twentieth century.”

-Steven Johnson

 

The title of this morning’s Early Look is really the question I kept asking myself while I spent some time up at the lake in Canada last week. The question being whether or not anyone understands where this grand central-market-planning experiment is taking us…

 

There’s a great long-term learning metaphor in How We Got To Now about glass: “Roughly 26 million years ago, something happened over the sands of the Lybian Desert… Grains of silica melted and fused under an intense heat… The compounds of silicon dioxide that formed had a number of curious chemical traits.” (pg 13)

 

While the birth of modern glass didn’t happen until the 14th and 15th centuries in Venice, it wasn’t until the 20th that we came to understand the physical properties of one of the world’s most important innovations. “In a strange way, glass was trying to extend our vision of the universe from the very beginning, way before we were smart enough to notice.” (pg 43)

 

Back to the Global Macro Grind

 

Longer-term, are central-market-planners smart enough to know what negative interest rates do to both economies and the banks trying to finance them? Shorter-term, are we dumb enough to think that what markets do on a weekly basis are signaling how this ultimately plays out? For the last year (intermediate-term), have we noticed anything about the #BeliefSystem breaking down?

 

Do We Understand? - central bankers cartoon 06.29.2016

 

On the longest of long-term questions, Janet Yellen said (under oath last month) that she hadn’t fully considered that keeping interest rate policy at 0% could be a bad thing. From a shorter-term perspective, you’re seeing the British burn their currency to new lows this morning, as the UK 10yr Yield plunges to 0.79%. Is it working?

 

After the 1st up week in the last 4, some global stock market cheer-leaders may think it has… but the real, volatility-adjusted absolute and relative returns for the last year have sided with the slower-for-longer, low-beta, safe-yield-chasing, camp of investors. Even in a broad based Equity Beta Chase, last week was no different:

 

  1. SP500 and Nasdaq were +3.2-3.3% on the week to +2.9% and -2.9% YTD, respectively
  2. EuroStoxx600 and DAX were +3.2% and +2.3% on the week to -9.2% and -9.0% YTD, respectively
  3. Nikkei (Japan) and Shanghai Comp were +4.9% and +2.7% on the week to -17.6% and -17.1% YTD, respectively

 

Whereas, both Long-term Sovereign Bonds and their equity market proxies did the following:

 

  1. US Treasury 10-year Yield dropped another -12 basis points on the week to 1.44% (down -83bps YTD)
  2. UK 10-year Yield crashed another -22 basis points on the week to 0.86% (down -110bps YTD)
  3. Germany’s 10yr Yield dropped back to negative, falling -8bps on the week to -0.13% (down -76bps YTD)
  4. Japan’s 10yr Yield fell another -8 basis points on the week to -0.25% (down -52bps YTD)
  5. Low Beta US Equities ramped another +3.7% on the week to +14.0% YTD
  6. High Yield US Equities added another +3.1% on the week to +7.4% YTD
  7. MSCI REITS Equity Index rose another +4.3% on the week to +11.5% YTD
  8. US listed Utilities (XLU) added another +3.7% on the week to +21.3% YTD

*for 5 and 6, that’s the mean performance of Top Quintile vs. Bottom Quintile SP500 Companies

 

In other words, if your view for the last year was that neither rate hikes nor rate cuts would do anything to stop economic gravity from slowing from its cycle peaks in Europe, Japan, and the USA, your long-duration bond and safe-equity-yield bet has absolutely crushed it.

 

Was it a longer-term cycle bet? Sure. A high-probability one that was measured and mapped by both incoming economic data and the macro market exposures that reflect upon them on a trending basis.

 

Is it something that central-market-planners expected? Of course not. That’s why I’m quite surprised that many of them still don’t understand that it’s negative rates themselves that are perpetuating the slow-down.

 

Long Gold?

 

I certainly hope so. Even if it only took world markets until the 21st century to understand that while Gold has “no yield”, it loves to compete in the asset allocation space for assets that have priced in negative yields… that should work for our subscribers.

 

Unfortunately from a shorter-term perspective, now that it’s up +26.9% YTD at $1345, it’s signaling immediate-term TRADE overbought as consensus is chasing Gold with as much enthusiasm as a levered long hedge fund chasing the SP500 when it goes green.

 

Per the recent (weekly) CFTC Futures & Options (non-commercial) data, here’s what net positioning looks like in big macro positions relative to where they’ve been in the last year:

 

  1. SP500 (Index + Emini) +66,900 net LONG contracts = a 1YR z-score of +1.9x
  2. Gold +273,179 net LONG contracts = a 1YR z-score of +2.1x
  3. US Dollar +12,425 net LONG contracts = a 1YR z-score of -1.3x

 

In other words, Consensus Macro is still betting that the Fed devalues the Dollar and that both US Equity Beta and Gold (and Oil, Commodities, etc.) go higher on that.

 

What if they can’t? And/or…

 

What if they are starting to understand (like macro market participants are) that they shouldn’t? What if they are starting to realize that burning America’s currency, crashing her bond yields to all-time lows, and pancaking the yield curve is bad for banks that hired them?

 

They didn’t understand that Japanese and European Equities were glass houses until they threw negative rates at them either.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.33-1.55%

SPX 1

NASDAQ 4

Nikkei 14

DAX 9128-9802

VIX 13.98-25.11
USD 94.90-97.55

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Do We Understand? - 07.05.16 Chart


Investing Ideas - Levels

Takeaway: Current Investing Ideas: DNKN, HOLX, HBI, LAZ, MDRX, FL, JNK, TIF, WAB, ZBH, TIP, LMT, GLD, TLT

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas.

 

Enjoy the rest of the holiday weekend.

LEVELS

Investing Ideas - Levels - levels 7 1


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REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.

 

Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)

 

Enjoy!   

 

1. McCullough: Gold Loves Blowup of Central Planning Belief System (7/1/2016) 

 

 

In this excerpt from The Macro Show today, Hedgeye CEO Keith McCullough lays out the bullish case for gold and highlights some disconcerting central planning statistics in Europe.

 

2. McCullough: Shameful Big Bank ‘Buybacks’ (6/30/2016)

 

 

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough exposes the ridiculousness of big bank stock buybacks and enablers at the Fed.

 

3. A Brief Primer On Our Bull Case For Long Bonds (6/29/2016)

 

 

In this excerpt from The Macro Show earlier today, Hedgeye Senior Macro analyst Darius Dale lays out the bull case for Long Bonds (TLT) and explains why consensus has completely missed it.

 

4. Global Brexplosion | About Everything with Neil Howe (6/29/2016)

 

 

In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses last Thursday's Brexit vote and the broader implications for investors. "By failing to tear down and rebuild such hapless and dysfunctional institutions as the European Union, political leaders have left electorates few options other than total disruption," Howe writes.

 

Click here to read Howe’s associated About Everything piece.

 

5. Fantasy Land! A Look at This “Final” GDP Report (6/28/2016)

 

 

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough rips apart the government’s latest GDP calculation. “You couldn’t make this up if you tried,” said McCullough. “And you wonder why people are getting upset with the establishment and the making up of numbers.”

 

6. McCullough: Crash Goes The Pound (6/27/2016)

 

 

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough weighs in with his unique take on the beleagured U.K. currency.


About Everything: The Global Economy Gears Down

Even Before Brexit, Global Growth Was Decelerating.

 

Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses lackluster global growth and the IMF's continually downgraded GDP forecasts. 

 

About Everything: The Global Economy Gears Down - dead flower

WHAT’S HAPPENING?

Shortly before the Brexit vote, the International Monetary Fund (IMF) warned that a British exit could cut U.K. GDP growth by 0.8 to 3.0% in 2017. In the following year, 2018, it projected that Brexit would cut rest-of-EU GDP by 0.2 to 0.5% and rest-of-world GDP by 0.0 to 0.2%.

 

No news there: Few imagined that Brexit would be a stimulant. What’s less widely known is that the global economy was slowing down well before it entered the Brexit sand trap.

 

According to the IMF, GDP growth shrank from 5.0% in 2010 to 3.1% last year. The World Bank reports that global GDP growth fell from 3.8% in 2010 to 2.4% last year. The brief re-acceleration in 2014 kindled momentary optimism and then disappeared. Emerging markets and developing economies (EMDEs) have fared the worst, with growth sliding almost every year, while advanced economies have been zig-zagging well below 2% growth for years now. (The IMF and World Bank global growth rates don’t match due to the different ways they weight national GDPs.)

 

About Everything: The Global Economy Gears Down - chart 2

 

About Everything: The Global Economy Gears Down - chart 3

 

Current-year forecasts are marred by negative surprises. The latest IMF projection pegs global growth in 2016 at 3.2%—down from an earlier 2016 projection of 3.4% in January and 3.8% last year. The World Bank’s 2016 projection of 2.4% has likewise shriveled— from 3.2% in January and 3.5% last year.

 

If this strikes you like a quarterly earnings forecast (where the quarter gets uglier the closer it gets), you’re on to something.

 

In fact, over the past decade, these highly compensated, D.C.-based bureaucrats have consistently chosen to revise their predictions downward. Back in 2010, when the IMF took its first stab at growth figures for 2015, the estimate (+4.6 percent) came in at nearly double the final figure. 

 

About Everything: The Global Economy Gears Down - chart 4

 

About Everything: The Global Economy Gears Down - chart 5

 

This pattern means that, as disappointing as the 2016 projection looks today, the final number will probably come in even lower.

 

Not surprisingly, the IMF year-ahead odds of recession have been rising since April of 2015 in nearly every region except Emerging Asia (where it remains zero). Since Latin America is already in a recession, that one is an easy call.

 

About Everything: The Global Economy Gears Down - chart 6

 

If you don’t trust national accounting and prefer to look at the activity reported by firms, the picture you get is pretty much the same. Take a look at Markit’s Global PMIs: You see a dip in 2012, a peak in 2014, and decline thereafter. Indeed, Global Manufacturing now teeters on the edge of contraction.

 

About Everything: The Global Economy Gears Down - chart 7

THE DEVELOPED WORLD: JUST TREADING WATER

The high-income economies haven’t exactly surged over the past five years—but they haven’t done too badly, either. Back in 2012 and 2013, both the Eurozone and Japan were moving in and out of recession. Today, at least for now, they’re out. According to the World Bank, GDP growth in these regions did pick up in 2014, rising from 1.3% to 1.8% (about where it was last year). Real import growth and real investment growth have been trending up since 2012.

 

Labor conditions are also improving in most advanced economies—most notably the United States. According to the most recent BLS Employment Situation Summary, the U.S. unemployment rate took its first big step downward in months, hitting 4.7% in May.

 

Other indicators are less encouraging. The IMF reports that headline inflation in advanced economies averaged just 0.3% in 2015, the lowest level since the recession. Long-term interest rates have been on a downward slide for years. Ten-year bond yields are now well below 2% in the United States and—post-Brexit—heading below zero in Germany and Japan.

 

Unfavorable demographics has constrained high-income GDP growth in recent years and will constrain it further in the future. According to the U.N. Population Division’s medium growth variant, the working-age populations of Japan and most European nations have already peaked and will decline at gathering speed in the decades to come.

EMERGING MARKETS: A TALE OF DIVERGENCE

While the developed world is speeding up slightly, the EMDEs as a whole is slowing down sharply. Unlike in advanced economies, rates of real import growth and real investment growth have been falling in EMDEs since 2010 and are now approaching recession levels.

 

About Everything: The Global Economy Gears Down - chart 8

 

Yet the bigger story is the wide divergence of growth trends within the EMDEs.

 

Commodity-exporting EMDEs. Economies that mainly export stuff (oil, gas, minerals, agricultural products) are doing very poorly as a whole. The World Bank projects that commodity-exporting emerging markets will grow by a miniscule 0.4% this year, down from 3.2% in 2013. That’s by far the fastest deceleration of any group.

 

About Everything: The Global Economy Gears Down - chart 9

 

Obviously, these economies are getting hammered by falling commodity prices. Energy prices plummeted by more than two-thirds from mid-2014 to early 2016, and raw materials did little better. Sure, they’ve rebounded some this year, but commodities are still trading at bargain-bin prices, much to the dismay of export-dependent emerging markets like Russia, Saudi Arabia, Nigeria, South Africa, Venezuela, Chile, and Brazil.

 

Part of the problem is China’s “rebalancing” policy—moving the economy away from massive capital outlays and toward consumer spending. This may be good news for China’s emerging middle class, but it’s bad news for the export-dependent and often low-income countries that used to furnish the raw materials for all of China’s buildings, trains, harbors, and dams.

 

China. The largest of the non-export dependent EMDEs, China is still growing rapidly—just less rapidly than before. The World Bank predicts that the country’s GDP growth rate will shrink from 7.7% in 2013 to 6.3% in 2018.

 

On top of China’s marked shift in trade philosophy, it’s also facing a “currency crisis” that has many savers looking for an exit ramp. China’s efforts to downsize its industrial capacity, plus efforts to defend its currency, have had a tidal impact on the direction of global capital flows. Emerging market capital inflows have recently turned negative for the first time since 2008.

 

About Everything: The Global Economy Gears Down - chart 10

 

Other non-export dependent EMDEs. Most other non-exporters, however, are doing better than they were a few years ago. According to the World Bank, the GDP for this group (excluding China) has grown by nearly a full percentage point since 2013.

 

India’s economy is expanding well over 7% annually, where it’s expected to remain in the near future. Southeast Asia’s largest economies, the ASEAN-5 (Malaysia, Philippines, Indonesia, Thailand, and Vietnam), together are growing more than 4% per year.

 

Typically, these economies benefit from lower raw material and energy prices. And few of them are hurt by China’s declining import demand: ASEAN, for example, has turned into a net importer of Chinese goods.

TAKEAWAYS

  • Even before Brexit, global growth was gearing down. Each year since 2010—aside from a blip in 2014—the world economy’s growth rate has slowed. The IMF and the World Bank, if the past is any guide, will continue to lower their estimates for the coming years as time passes.
  • The global slowdown varies widely by region. China and the export-dependent EMDEs are falling fastest. Advanced economies are stable, even rising slightly, while non-export EMDEs (ex China) are speeding up

This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)

 

Enjoy!

 

1. Happy Independence Day (7/1/2016)

This Week In Hedgeye Cartoons - 4th of July cartoon 07.01.2016

 

Happy Independence Day.

 

2. Running Of The Bears (6/30/2016)

This Week In Hedgeye Cartoons - Spain cartoon 06.30.2016

 

Spain's IBEX is down 32% from its 2015 peak.

 

3. Guru Wisdom (6/29/2016)

This Week In Hedgeye Cartoons - central bankers cartoon 06.29.2016

 

This one speaks for itself.

 

4. Eject! (6/28/2016)

This Week In Hedgeye Cartoons - EU cartoon 06.28.2016

 

Who's next? Grexit? Spexit? Frexit?

 

5. A Not So Happy Hour For Bulls (6/27/2016)

This Week In Hedgeye Cartoons - Not last Friday cartoon 06.27.2016

 

Equity markets continued to tumble today as post-Brexit aftershocks continue to be felt.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%
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