“My crown is called content, a crown that seldom kings enjoy.”
-William Shakespeare
I’m not a billionaire or a bond king. I’m just a Mucker.
I have to get up, every market day, at 435AM and just grind, grind, grind.
The day I stop doing that is the day all the kings and queens of the Old Wall will happily sweep my remains to the curb. There will be no compliments. There will be no ceremonies. I’ll be what everyone subservient to the establishment has always become, forgotten.
Back to the Global Macro Grind…
To be clear, I don’t “make calls” to get attention. I make them to make money. Whatever my small place in this profession has become, I’ve made enough contrarian calls over the course of my career to help take care of my family and firm.
I’m grateful for that. Without your business and support, none of this happened.
While it’s always nice to get compliments on the calls we’ve made this year (#ChinaSlowing, #EuropeSlowing, #ShortEM, #StrongDollar, #Quad4 in Q4), what I really care about at the top of every risk management morning is making the next one.
Yes, the next one. What’s the next big contrarian call that no one with a “chart” is willing to believe?
Btw, pre the recent -11.2%, -9.6%, and -6.9% draw-downs in the Russell 2000, NASDAQ, and SP500, didn’t those “charts” look great? The “charts” of Emerging Markets, Bitcoin, and Chinese Internet stocks looked “awesome” 12 months ago too.
After 3 years of essentially going up into the right, what’s one of the “best looking charts” that remains in all of Global Macro? Oh, no. There’s no deformed head-and-shoulders to this great dame. She’s absolutely beautiful. She’s the chart of the UST 10yr Yield.
And, yes, dear Sirs and Madams of the establishment. I concurred up until most recently that US Treasury Yields (particularly on the short-end of the curve) should rise towards the heavens as “expensive” US growth stocks joined that epic party in style…
But recently… too recently, indeed… I have said goodbye to the most beautiful chart of the said-alpha-aristocracy. I have gone to the Quad 4 in Q4 dark side. I am long US Dollars, Short Momentum, Short High Beta, and Short US Growth. I am long of the Long Bond.
And what does The Bond King have to say about that dark alley of inflation and growth slowing where I have chosen to toil?
- The Fed is raising rates (indeed, for almost 3 years now and 3 times in 2018)
- The size scope of debt issuance and deficit spending shall consume us all
- “Inflation” is going higher and higher from here…
Rather than boil the ocean on #1 and #2, essentially where we disagree most obviously is on point #3. Fortunately (bond yields are down this week), the commoner I spend most of my time with (the economic data) agrees with me and not The King:
A) Wednesday’s PPI (US Producer Price Report) #slowed another -20bps to +2.6% year-over-year, marking a 3rd month of deceleration off #ReflationsPeak of +3.4% registered in June of 2018
B) Thursday’s CPI (Consumer Price Inflation) #slowed for the 2nd consecutive month, decelerating a full -42bps sequentially to +2.28%, marking the slowest pace of consumer price growth since February of 2018
Furthermore, our measuring and mapping #process sees headline inflation (CPI) dropping almost 100 basis points from the July 2018 #CyclePeak to where we have it by the end of Q1 of 2019.
Rather than opine from The Tower on what inflation, tariffs, deficits, etc. “should do” (happy to entertain these types of intellectual discussions over a few glasses of vino, if the aristocracy will spare me some!), we focus uniquely on what the data is actually doing.
I don’t just run my mouth on that. We run proprietary predictive tracking algorithms that update in real-time, embracing both real-time market prices, and incoming economic data, like good Bayesian Boys in the back office should do.
In today’s Chart of The Day, you can see our most recently refreshed nowcast for headline CPI vs. the establishment’s forecasts:
A) We have Q418 inflation #slowing to 2.23%
B) We have Q119 inflation #slowing to 1.82%
Can the Fed continue to raise rates into a rate of change slow-down in both US growth and inflation? How about into ongoing melt-downs in Global Stock markets? Yes. In fact, most of the time, that’s what the Fed does. It reacts on a lag to lagging economic data.
The way we muckers and grinders do it is we try to front-run both the Fed and their followers’ established positioning. The same model we used to buy the Long Bond in 2015 (and not sell it until mid-2016) is the same model we’re using today.
I don’t have to make a call that the UST 10yr Yield is going back to +1.4%. My process says that after 9 straight quarters of the USA being in Quad 1 or 2 (#GrowthAccelerating), I should A) stop shorting the Long Bond and B) start buying it.
I know. I’m a liberal and conservative man all at once. I go both ways. I don’t get paid to push any asset class or the Kingdom’s agenda permanently one way or the other. But please don’t judge me on my style and status.
At a bare minimum I ask that you to consider judging me on both my process and results. I’m not trying to be your king. I’m trying to be the voice of the data-driven and politically dispassionate content that our #process produces.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.98-3.28% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 52.00-54.73 (bullish)
Industrials (XLI) 72.95-77.47 (bearish)
Shanghai Comp 2 (bearish)
DAX 118 (bearish)
VIX 13.89-29.62 (bullish)
USD 94.25-96.00 (bullish)
Gold 1179-1229 (bearish)
Bitcoin 6069-6542 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
