“I think there’s a fundamental problem in terms of how macro economists look at the economic outlook, growth, and inflation.”
-Bill Dudley
Buy Bond Proxies? Fortunately, post yesterday’s smack-down, my short answer to that question has been not yet. Especially in Q2, that view has been mostly driven by our #process. Our forecast remains that US inflation will accelerate to new cycle highs this summer.
It’s also been partly driven by the lack of an accurate and/or repeatable #process by Consensus Econs. While I highly doubt the New York Fed’s Bill Dudley would publicly admit that his successor (John Williams from the SF Fed) has fundamental forecasting problems, I will.
My job isn’t to support the Old Wall and its broken forecasting models. It’s to help you make and save money playing against their consensus views. As Ray Dalio reminds us in Principles, “We financial people see the world very differently from the way economists do.” (pg 83)
Back to the Global Macro Grind…
Not to be confused with the Consensus Conference (the big crypto conference this week) where plenty of cool coin salesmen are seeing the price of Bitcoin break-down after failing @Hedgeye TREND resistance, Consensus Econs present tremendous value to me and my team’s process.
The San Francisco Fed’s Williams tried to convince a crowd of head bobbers yesterday that “inflation is not taking off.” Meanwhile Oil was ripping to new YTD highs alongside the UST 10yr yield doing the same at 3.08%.
By the time US headline inflation has #accelerated to or above +3.0% year-over-year growth rate this summer, the poor guy won’t see what the market sees. Like I said, you can make and save money on that.
On the rip to 3.08%, how did the Bond Proxies do?
- US Housing Stocks (ITB) led losers, dropping another -3.8% to -14.8% YTD
- REITS (VNQ) fell another -1.6% taking their YTD loss to -8.0%
- Utilities (XLU) declined another -0.8% to -5.5% YTD
- Consumer Staples (XLP) lost another -0.4% to -13.3% YTD
- Gold Miners (GDX) got tagged for a -2.3% loss to -4.2% YTD
This, of course, wasn’t all “rate driven.” It was also Dollar Driven. At this stage of the late US economic cycle, Gold in particular absolutely abhors a strengthening US Dollar.
Dollar Up, Rates Up, Gold and Bond Proxies Down – I’m in no rush to change that view.
That doesn’t mean I won’t change the most rate sensitive part of that view. Heck, that’s probably why I’m getting so many questions about it. Everyone who follows me knows I like to go both ways. Not everyone knows I’m getting more patient and picky on timing with age!
Bar none, the best time to own Bonds and their Low Beta, Slow Growth, Bond Proxies is when we’re in Quad 4:
- Quad 4 is when growth is slowing on a trending basis … and
- Quad 4 is when inflation is slowing on a trending basis
Therefore, there should be a time in the next 3-6 months where I say goodbye to the long late-cycle #InflationAccelerating exposures that continue to deliver alpha for us right now in Q2 (long Commodities as an asset class, long Energy Stocks, etc.).
But that time didn’t have to occur yet.
What are some of the big things I’ll be watching to make this timing decision?
- My @Hedgeye Risk Range and TRADE, TREND, TAIL signals for CRB Index, Oil, Energy Stocks, etc.
- My @Hedgeye Risk Range and TRADE, TREND, TAIL signals for both USD and UST 10yr Yields
- My @Hedgeye Risk Range and TRADE, TREND, TAIL signals for Housing, REITS, Utes, Staples, etc.
In other words, as always, I’ll be watching everything. When it comes to discounting future headline “news”, Mr. Market is far superior to me. All that remains between where growth and inflation is today and how it’s priced for tomorrow is time, price, and space.
In addition to my quantitative signaling #process, I have the fundamental research #process (i.e. what Quad is a country in and/or heading toward). That’s obviously another big thing that we’ll be measuring and mapping daily.
Not ironically, the fundamental #GlobalDivergences in GROWTH is also what drove the DOLLAR UP part of yesterday’s risk management equation. In the last 24 hours both Germany and Japan printed #GrowthSlowing GDP reports for Q118 (both absolute and relative to USA’s).
Consensus Econs didn’t call for either an Asian or a European slowdown, of course. That’s their fundamental problem. It’s our big opportunity.
Our immediate-term Global Macro Risk Ranges (with intermediate term TREND views) are now as follows:
UST 10yr Yield 2.94-3.08% (bullish)
SPX 2 (neutral)
RUT 1 (bullish)
NASDAQ 7101-7499 (bullish)
Energy (XLE) 74.02-78.48 (bullish)
Industrials (XLI) 70.91-75.77 (bearish)
VIX 12.74-16.54 (bullish)
USD 92.00-93.30 (bullish)
EUR/USD 1.17-1.20 (bearish)
YEN 108.69-110.40 (bearish)
Oil (WTI) 68.29-72.38 (bullish)
Gold 1 (bearish)
Bitcoin 8 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
