“Above all, try something.”
-Franklin Roosevelt
Was Jerome Powell #DovishEnough yesterday? Big time. He went Triple Dovish!
The aforementioned quote is a well-known one that Doris Kearns Goodwin uses to introduce Chapter 7 of her latest US history book, Leadership In Turbulent Times (pg 160).
If you think the Powell/Trump Fed is dovish now, just wait until you see how dovish they get if and when we enter a US Earnings Recession. Turbulent times for many companies those will be!
Back to the Global Macro Grind…
In the meantime, no worries… unless you’re Best Idea is to be long “cheap” bank stocks!
Wow was that an awesome move in the Treasury Bond market (if you’re long Treasuries, across the curve) and a devastating one for the Financials (XLF) which closed down -2.1% on the day.
I know many people think that you “can’t fight the Fed.” And, to be clear, I’m not fighting the Fed. Instead of fighting my US #GrowthSlowing view (and raising rates into a slow-down), the Fed is almost agreeing with our forecasts now.
Tripling down? Yep. Unlike Fedex (FDX), who has only cut its forecast 2x in the last 3 months, Powell has gone incrementally dovish 3x in less than 3 months:
- DOVISH from HAWKISH (the man raised rates in DEC!) was pivot one
- DOVISH to more DOVISH was pivot two (when he said the Fed was on “pause”)
- DOVISH to DOVISH ENOUGH was pivot 3 (yesterday, dropping the dot plot)
From a Factor Exposures perspective, have you noticed the incremental market impact of each incremental pivot?
Certainly from a Treasury Bond market perspective, it hasn’t been subtle. You’d have much preferred being long Oil, Gold, and Energy (XLE) yesterday than Financials (XLF) and Industrials (XLI):
- UST 2yr Yield just got smoked to lower-YTD-lows at 2.39%
- UST 10yr Yield got triple smoked to lower-YTD-lows at 2.51% too
- Energy Stocks (XLE) were up another +0.9% on the day to +2.4% for March-to-date
- REITS (XLRE) were up another +0.5% on the day to +1.8% for March-to-date too
- Financials were down -2.1% on the day to -1.4% for March-to-date
- Industrials were down another -0.7% on the day to -3.2% for March-to-date too
The US Dollar obviously got smoked by the Triple Dovish Powell Pivot. That, and the aforementioned Sector Style moves, is precisely what happens in what we call Quad 3.
When the US economy is already #slowing and the Fed is trying to perpetuate asset reflation, what you get is economic stagflation and #EarningsSlowing at a faster rate.
Why?
Unlike cutting rates and trying to devalue the US Dollar, the Fed can’t cut labor. As #LateCycle labor inflation persists and company revenues slow, the Fed is also jacking US consumers with higher gas prices at the pump.
Oh, you don’t remember that part? See $150 Oil in 2008 for details.
No, this is not 2008. It’s certainly not 2016 either. We get that question about 2016 from Macro Tourists because they want to believe that the Fed going dovish is going to perpetuate an economic acceleration.
Unlike in 2016, when the US economy was coming off its mid-cycle #slowing LOWS (when the y/y rates of change in US GROWTH and INFLATION bottomed and re-accelerated):
A) US GDP Growth is coming off its 2018 cycle HIGHS
B) US headline INFLATION is coming off its 2018 cycle HIGHS
C) US Corporate PROFITS are coming off their 2018 cycle HIGHS
For those of you who crushed it in your 401k yesterday, you get that.
That’s why you’re long Treasury Bonds and their US Equity market proxies (Utilities and REITS). Be thankful that not everyone else gets what you got right about The Cycle. In the 2H of 2016 you should have been shorting Treasuries.
Will the formerly-contrarian call from 6 months ago to Buy Treasuries when CNBC pundits and Bond Kings alike were telling you “rates are heading higher from here” become a consensus long now? Probably.
Does that mean you need to freak-out and sell all your Treasuries today? Or should you just smile and book some gains? Above all, when you’re long things that ramp to the top-end of the @Hedgeye Risk Range, sell something.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.47-2.65% (bearish)
UST 2yr Yield 2.36-2.47% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 56.64-58.52 (bullish)
REITS (VNQ) 84.01-86.79 (bullish)
Energy (XLE) 63.40-66.52 (bullish)
Financials (XLF) 25.43-26.75 (bearish)
VIX 12.10-17.13 (bearish)
USD/YEN 110.15-111.83 (bearish)
GBP/USD 1.30-1.33 (bullish)
USD/CHF 0.99-1.01 (bearish)
Oil (WTI) 56.77-60.93 (bullish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
