“The hallmark of originality is rejecting the default and exploring whether a better option exists.”
-Adam Grant
I’ve spent a lot of time in the last 16 months trying to think for myself on why slower and lower for longer was the better option than living in perpetual fear of a redo of the “rates rising” call we made (short the Long Bond and Gold) in 2013.
Thank god I have great, data dependent, teammates. Without them grinding through the data on big sequential head-fakes, it would have been next to impossible to explore the real possibility that trending US and Global Growth would continue to slow in the 2nd half of 2016.
Now what? Are we in the middle of a double-dip #recession in cyclicals? How about the recession in US corporate profits that hasn’t gone away? After we get through this Federal Reserve nonsense tomorrow, we can go back to doing our job, measuring and mapping the data.
Back to the Global Macro Grind…
The Original Long Bond Bulls understand the secular demand problem that is American Demographics. I think someone like Jeff Gundlach in particular has been right on the money with a view I think he shares with our very own Demography Sector Head, Neil Howe.
That’s the longer-term call. It’s one I highly doubt Gundlach has changed his mind on. In the shorter-term, he’s been way more cautious than I’ve even hinted at being on both long-term bonds and their equity proxies.
While being on the other side of him at this stage of the game probably makes me overthink my premise (the guy is just flat out good), I think I’ll be less bad at macro if I can come out on the other side of this debate with either a tie or a win.
Q: A tie? What kind of a mediocre athlete plays for a tie?
A: One that’s behind in the game
In my own 7 game series, this is game 6… and I’m down by a goal going into the 3rd period. As you can see in the Chart of the Day, since this is the 6th “rates are gonna rip” scare in the last 16 months, my team has already won 5 games in a row and now we’re just playing for fun.
Oh, and I’m a better hockey player than Jeff too.
“Man, you cocky little Mucker.” Yes, Jeff – that is with a M, not an F. The CEO of Wells Fargo spells his last name with F. And let’s just thank God we’re not him testifying in front of the Senate Banking Committee today! Lots of F-bombs from WFC and “Financials” bulls in 2016. #Lots
In all seriousness though, I’m feeling pretty good about tying this game up in the 3rd period. Is confidence allowed anymore in this game? I certainly hope so. Versus Gundlach’s view, this is where I think the game is at:
- Gundlach doesn’t think the Fed makes a policy mistake and raises rates tomorrow – I agree.
- Gundlach thinks the Fed’s commentary is going to be hawkish – I don’t (isn’t not raising implicitly dovish?)
- If Gundlach is right and the Fed is hawkish, I think the data gets even more dovish in SEP anyway.
You see, the Fed going from hawkish to dovish to hawkish to dovish to hawkish (i.e. the last 5 rhetorical policy pivots in the last 16 months of this epic 7 game series) has been a major catalyst augmenting the longer-term TREND of real GDP #GrowthSlowing:
- When they went hawkish (raising rates in DEC) they triggered Deflation’s dominoes = bearish growth and inflation
- When they went back to dovish in MAR, they triggered a reflation of the deflation = stagflation
- When reflation ramped, sequential “inflation” data did, and so did lots of things that are in a recession
- When they went back to hawkish in August… Oil, PMIs, ISMs, etc. did the double-dip cyclical recession thing
- If they stay hawkish, all that cyclical, energy, and industrial “data” will continue to slow
Then they’ll go back to dovish into the election anyway. They’re one more bad jobs report away from that.
If you actually read one sentence below the Old Wall Media headline that “Gundlach Sees Hawkish Fed Statement And Unfriendly Bond Environment”, you’ll see that he thinks the “new normal” in the 10yr is going to be 1.70% instead of 1.55%.
In other words, he pasted me to the boards with this 6 week call to be short duration after the most epic decline in long-term bond yield history. But I don’t think he’s going to beat me being short duration for either the 2016 season, or the rest of game 7.
As for Gundlach’s outlook on 2017, that’s a different 7 game series for the little David (McCullough) vs. the Bond Market Goliath. I’m secretly hoping we end up on the same team again. The handoff to “fiscal” is one that could scare yields higher – and maybe for the right reasons.
But, some big things happen before we get to that part of #TheCycle. The #1 catalyst for bond yields to rise isn’t a headfake in “inflation”, it’s real GDP growth accelerating like it did in 2013. #BigFiscal needs a catalyst too – a double-dip recession in everything that hasn’t bottomed.
That’ll be when this Original Long Bond Bull hopefully sells into a re-test of the all-time high.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.52-1.73%
SPX 2105-2159
VIX 14.02-19.84
USD 94.50-96.25
Oil (WTI) 42.05-45.20
Gold 1
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
