This note was originally published at 8am this morning, September 7, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“For my part I know nothing with any certainty, but the sight of the stars makes me dream.”
-Vincent van Gogh
Back to the grind this morning. I’ll try to kick things into gear by keeping this tight. I’ll start where I always do, utilizing real-time market prices and the governing principles of chaos theory in our macro models. Managing risk in this increasingly interconnected global marketplace always starts with accepting uncertainty.
Chief of the Reserve Bank of Australia, Glenn Stevens, had this to say overnight as he kept Aussi rates unchanged at 4.5%:
“With growth in the near term likely to be close to trend, inflation close to target and with the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate for the time being.”
Crisp, concise, and the to the point. To be sure, saying “somewhat uncertain” was pointed directly at Ben Bernanke who calls today’s global economy “unusually uncertain.” Altogether, global risk managers and central bankers alike should simply accept uncertainty in what it is that they do.
While I’m not certain about what it is exactly that Bernanke does in managing multi-factor and multi-duration global macro risk every day, I am certain about what it is that Congress does whenever they have an economic problem to solve for – spend.
Taking President Bush’s lead in increasing government spending, President Obama introduced another $50 BILLION in stimulus spending over the long weekend. This isn’t a political point – it’s a mathematical one. As you increase the numerator (spending) and the denominator continues to shrink (GDP), the ratio of US deficit/GDP goes up.
While there was some sort of sadistic fanfare associated with a 9.6% unemployment rate in this country being “better than expected” on Friday, we are going to look at the current intermediate term TRENDS in both US employment and consumption for what they are and we’re going to cut our US GDP growth estimate from 1.7% for Q3 to 1.3%.
What are the main macro signals in the US marketplace that continue to flash slowing growth?
1. US Currency – the US Dollar was down last week for the 12th week of the last 14, losing another -1.1% of its uncertain value as the world’s reserve currency. Perhaps the President’s plans for additional stimulus leaked into week’s end. You tell me.
2. US Bond Yields – after rising from its YTD lows last week, the interest rate on 10-year US Treasuries are falling again this morning back down to 2.65%. Notwithstanding that our intermediate term TREND line of resistance remains much higher (up at 3.01%), the reality here is that the bond market doesn’t lie about US GDP growth; politicians do.
3. US Equities – after a big rally from oversold lows (we covered most of our short positions between August 24th and 25th walking through the math associated with the 1040 level being an important level to book gains on the short side), the SP500 remains bearish from an intermediate term TREND perspective. Our Bear Market Macro line in the sand remains 1144, and we have immediate term TRADE resistance at 1107.
This isn’t to say that there aren’t other countries, currencies, and commodities in this world that won’t do well in this uncertain macro marketplace (after being bearish on them for the first half of 2010, we are long Chinese equities via the CAF). This is simply an opportunity to recognize that there is nothing “unusual” about how currency, bond, and equity markets in the US are correlating.
What could change our view that US GDP growth is slowing?
1. Weekly Jobless claims dropping, sustainably, below 390,000.
2. Weekly MBA mortgage applications showing some semblance of a demand signal for US Housing (as opposed to the lowest levels of demand since 1997).
3. Weekly price performance of US currency, US Treasury bonds, and US stocks changing their intermediate term TRENDS for at least 3 consecutive weeks.
What could change our call for American Austerity (Q3 Hedgeye Macro Theme)?
1. Slowing US government spending
2. Accelerating US GDP growth
Unfortunately, despite the “sight of the stars” of the northern lights last week, I am certain that I see neither government spending nor growth in America changing their respective bearish paths this morning.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
HEDGEYE RISK MANAGEMENT