“We urge change.”
-Benoit Mandelbrot
I’m up in the homeland this week. This time of year is always a wonderful opportunity to spend time with my wife and kids. Selfishly, I do from time to time get to sneak away for some fishing and fractals. Reading about fractals fascinates me as much as the fish do.
The aforementioned quote came from the founding father of Fractal Geometry, Benoit Mandelbrot, in October of 2008. Fortunately, for all of us, the establishment in our profession has not yet heeded his advice. This presents us with the golden opportunity of change.
As Mandelbrot wrote in The Misbehavior of Markets, “Financial economics, as a discipline, is where chemistry was in the 16th century: a messy compendium of proven know-how, misty folk wisdom, unexamined assumptions, and grandiose speculation.”
Back to the Global Macro Grind…
If everyone’s already figured it all out, why haven’t they been ultra-long both duration and Gold for the last year? “All-time highs” in SPYs are fun to navel-gaze at, but reality is that on a year-over-year basis:
- Gold is up +23.2%
- Extended Duration Bond (EDV) is up +18.0%
- The Long Bond (TLT) is up +12.1%
- SP500 is up +3.7%
Yes. I know. There are some very bond-like components of the SP500 that have crushed it more than TLT has (Utilities (XLU) and REITS (RMZ Index) are +14-15% year-over-year, respectively), but … seriously, Gold has been going all power-law on the bears.
“Examine price records more closely… and you typically find a different kind of distribution than the bell curve: the tails do not become imperceptible but follow a power law. These are common in nature.” –Mandelbrot, The Misbehavior of Markets (pg 13)
Do your returns in the last year look more like equity beta than they do the power-law thing embedded in the Phelps Gold count? He won #21 and #22 last night. In fishing speak, that dude has ripped some serious lip!
Since July of 2015 (Global Equity Bubble Top), it’s been a Golden Opportunity to invest in Global #GrowthSlowing.
When both local (US GDP has slowed from 3% to 1%) and global growth are slowing, long-term bond yields fall. Then … central-market-planners try to make them fall further, in hopes that the illusion of growth (“stocks” in devalued currencies) fools you.
All the while, those who are long either duration and/or safe-yields get paid, taking on much less portfolio volatility.
But, but… “they’re expensive” (Old Wall PM speak for I didn’t and don’t own them) and “eventually” the bubble in bonds “has to pop” (but in “stocks”, never – always room to go higher)…
That’s what’s been filling up my inbox for the past few weeks. And that’s primarily because long-term bond yields, globally, bounced off their all-time lows. The widely watched widow-maker (for Long Bond Bears) – Japanese Government Bonds – sold off 22 basis points!
That’s in yield terms. But what does this immediate-term TRADE higher (in yields mean)?
- That growth is back, baby! (???)
- That a fiscal bazooka strapped to a Qe5 Heli-Ben might work?
- That what crashes (yields) eventually bounces, for a trade?
While #1 is what we continue to track like a bear (like in 2013 when our call on US #GrowthAccelerating had us bearish on both the Long Bond and Gold), it’s showing nothing but signs of TRENDING (multi-quarter cycle research) growth slowing.
When it comes to #2, there’s always a chance! So we’ll have to see about that (Krugman is sooo excited!). Meanwhile reason #3 is the winning answer, until Mr. Macro Market goes all fractal on us and signals otherwise.
On that score, here are some @Hedgeye intermediate-term TREND signal levels to watch:
- US 10yr Yield TREND = +1.87%
- Japan 10yr Yield TREND = +0.03%
- German 10yr Yield TREND = +0.24%
- UK 10yr Yield TREND = +1.39%
That last one (UK 10yr Gilts) is conspicuously kept out of the email chain on how “this is it… look at JGBs…” and that’s mainly because it doesn’t corroborate the view that “bonds yields can’t go lower.” Today alone the UK 10yr Yield is down 6 basis points to +0.52%
Oh, and US, German, and Japanese 10yr Yields are all lower too this morning to +1.54%, -0.10%, and -0.11%, respectively.
So if you nailed it (instead of being nailed for the last year shorting “expensive” bonds and their proxies) and shorted JGBs, Bunds, and Treasuries at the all-time lows in yields, I say you book those gains before the Gold Bond Bulls run you over.
We’re not yet Merrill’s thundering herd of stock chart chasers, but we’re a growing community of longer-term investors who crush it when growth slows. We continue to urge you to understand this causal factor and change your asset allocation accordingly.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.44-1.60%
SPX 2155-2189
RMZ 1
VIX 11.01-14.99
USD 94.80-97.00
Gold 1
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
