Editor's Note: Below is a brief excerpt transcribed from today's edition of The Macro Show hosted by CEO Keith McCullough. This is transcribed from the Q&A portion of the show in which McCullough responds to a subscriber question about buying bond yields. Click here to learn more about The Macro Show.
Hedgeye Subscriber: Keith, with the 10-year Treasury signaling lower highs, when do you signal buy bond proxies? Understanding that you'll change your mind as the data changes, would you start building a position in bonds at the top end of the risk range in yields? I know you've said that inflation will continue to surprise to the upside throughout the Summer.
Keith McCullough: To be clear it's always dangerous to be buying something that's bearish trend, which is long-term and short-term bonds and Utilities. We were on the road visiting institutional managers yesterday – long-onlys, a big private equity firm and long-short macro fund so we did the rounds – and what I keep saying is, "On days where bond yields go to the top-end of our risk ranges on inflation reports that you know will be hawkish, that's where you make decisions to either cover some shorts in Utilities and bonds or, if it's your plan because it takes you a long time to move, to be adding to a new exposure."
Within 3-6 months, the new alpha exposure is going to be bonds and bond proxies. That's because in the back half of 2018 our proprietary predictive tracking tracking algorithm for GDP suggests the U.S. economy is going to slow.
That's what our outlook says right now but you don't want to time that completely improperly. Now, a lot of people don't believe in market timing like I do so their instinct isn't to wait for the most surgical moment. That's what I do. I'm proud of it and I'm not saying that I don't screw it up sometimes. But I'm also not long Utilities or bonds today and that would be a big screw up. Utilities (XLU) and Consumer Staples (XLP) are down -7.8% and -9.9% for the year-to-date. We also told subscribers to stay long our favorite sector, which is Consumer Discretionary (XLY) up +11.8% year-to-date.
Now, again I wouldn't disagree with the question about buying if you're at the top-end of the range on bond yields or the low end of the range on Utilities or REITs. REITs, in particular, are interesting, or a place that I'd be buying at the low end of the range. REITs have already turned bullish trend so that's unlike the bearish trend in bonds and Utilities.
I'll say it again: Be careful buying bearish trends. Wait for the market signal.