“There are but two parties now - Traitors & Patriots, and I want hereafter to be ranked with the latter.”
-Ulysses S. Grant
In 2017, there have been but two positions to take – Bull or Bear, and I’ve wanted to be distinctly ranked as the former. That doesn’t mean I want to be buying after every one of these ramps to all-time highs.
No, no, no. As General Grant would tell his leadership team and troops, “I’m simply in to do all that I can.”
It’s not always easy but someone has to do it. If I have conviction, I try to give it to you every morning so that you can buy into corrections and/or sell some after rallies. There’s a difference between leading and chasing. I don’t chase.
Back to the Global Macro Grind…
So, yes, I’d be raising some cash today. Book some gains. Smile. And proactively prepare your risk capital to be positioned to take advantage of the next correction in US growth expectations.
To be crystal clear, the Fed’s “Dot Plot” isn’t the growth expectation you should be positioning for. On the absolute contrary, whenever the opportunity arises, you wanted to be fading that.
I get why both the Dollar and Rates sold off yesterday. That was clearly a Dovish Hike. But that’s just a day-trade. You should be paying us to help you fade trades and focus on the intermediate-to-long-term TRENDs.
Dot and plot this:
A) The Fed cut the top-end of its 2017 GDP forecast and now has a range of +1.7-2.3% year-over-year growth
B) Hedgeye’s Predictive Tracking Algo has 2017 US GDP accelerating from +2.3% (y/y) in Q1 to +3.1% in Q4
You can A/B test the difference in whatever “data dependence” remains in Yellen’s legacy, but if we continue to be right on US #GrowthAccelerating, it will be the data that raises rates, not her Fed.
How about that data?
- US RETAIL SALES – are now trending in the +5.7-6.0% (year-over-year) growth range for 2/3 of Q1 and what is called the “Control Group” (for reported GDP) is +4.0% year-over-year
- US CONSUMER PRICES – just hit a 61 month high in FEB at +2.7% year-over-year growth
This is, of course, February data. And it’s March.
I have no idea how the Atlanta Fed “tracker” is down at +0.9% GDP for Q1, but Darius and I quite like it when establishment economics departments have wildly varying forecasts vs. our own.
As you can see in today’s Chart of The Day, the Atlanta Fed’s GDP forecasts have 230 basis points of intra-quarter revisions (tracking error) since inception on a number that has a typical 0-300 basis point range. #lol
Yes, that is funny. Inasmuch as Bloomberg tweeted that US Retail Sales were “slowest in 6 months”, when the growth rate is DOUBLE what it was 6 months ago. Double lol!
The game of gaming bullish vs. bearish (and biased MSM) growth expectations is only as fun as you’re going to make it.
If there’s anything I’d be focused on being less bullish on from here, it’s being long of “reflation” (especially commodity related reflation). Reflation’s Peak (Q1 Macro Theme) looks more and more likely to be established in Q1 of 2017.
With that in mind, what I think you should be thinking about for the next 2-3 quarters is as follows:
- Reflation’s Peak (or Inflation slowing in rate of change terms) doesn’t mean real growth slows
- In Quad1 (our Q2, Q3, Q4 forecast), real growth accelerates as inflation slows
- Dollar Up, Rates Up, US Growth Stocks Up is your asset allocation, not buying Industrial Commodity Reflation
Put simply, Quad1 is not Quad2 – it has a more sustainable real GDP growth algorithm than high nominal GDP does. The math on that is simple. As inflation slows, the GDP “Deflator” falls, and real GDP accelerates faster.
Putting that into some simpleton US Equity Style Factor positions:
- BETA BETS: You’d be longer of Tech (XLK) than Industrials (XLI)
- RATE EXPOSURE: You’d much prefer Financials (XLF) over Utilities (XLU)
- BIG CAP STOCKS: you’d be long BAC and short CAT
You’ll be buying the Russell Growth (IWO) next time you have another big buying opportunity; you’ll be buying more US Dollars; and shorting more #GrowthSlowing exposures like Long-term Treasuries (TLT) when they’re overbought/oversold.
And if you don’t want to do those things, that’s your call. But it certainly won’t be because I’m not trying to lead you to where the puck is going vs. where it’s already been.
Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.47-2.65% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
VIX 10.58-12.51 (bearish)
USD 100.25-102.50 (bullish)
Oil (WTI) 46.01-50.22 (bearish)
Nat Gas 2.75-3.09 (bearish)
Gold 1189-1229 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
