As I may have mentioned a time or twenty, I'm not a big fan of basing investment decisions on one's "macro view." Such an approach would appear to be anchored in logic. The first step is to establish your macro view of the world. In other words, you first decide what is likely to happen to the economy, interest rates, inflation, stocks, currencies, commodities, etc. Simple, right? And then from there, you invest accordingly and wait for your thesis to play out. That's how Paulsen made his billions, right?
My problem is that I can rarely predict what one market is going to do next week, let along figure out what a slew of markets are going to do over the next year. Sorry, but I'm just not smart enough to pull this off. (And that darn crystal ball of mine is in the shop again!)
Exhibit A in my argument against average investors utilizing a "macro view" approach would be the current "consensus view" on interest rates.
Something Everyone Knows...
The phrase "something everyone knows isn't worth knowing" really applies here.
Ask yourself, what did just about every analyst on the planet expect interest rates to do in 2014? If you answered, "go up," go ahead and give yourself a gold star because you nailed it. Yep, that's right; most everyone, everywhere expected to see rates rising in 2014. And what have they done so far, you ask? Check the chart below.
30-Year Treasury Yield - Daily
Hmmm...the yield of the U.S. Gov't 30-Year Treasury Bond has moved from 3.964% on 12/31/13 to 3.503% as of yesterday's close (which is up from the year's low of 3.454% seen three days ago). This means that the yield on the 30-year has FALLEN 46 basis points - a decline of 11.6% - in less than four months. What gives?
As my friend and soon-to-be business partner Paul Schatz of Heritage Capital LLC wrote yesterday:
- IF the employment data are improving…
- IF retail sales remain strong…
- IF the Fed is tapering because the economy is doing better…
- IF consumer sentiment is constructive…
- IF shipments at Port of LA see largest increase in 7 years…
Then why is the most economically sensitive bond's yield falling out of bed like something dark is lurking?
Why indeed, Paul? (And for the record, Mr. Schatz has been bullish on bonds for the majority of 2014 - nice call.)
Top 10 Reasons Why Yields Have Fooled Investors
So, if you were a "macro" guy/gal, you were likely tempted to come into 2014 short bonds, because, hey, everybody knows yields are going up. The Fed is tapering, the economy is improving, and this trade is a no-brainer, right?
But for those of you keeping score at home, the Ultrashort 20+ Year Treasury ETF (TBT) is down -17.2% year-to-date as of yesterday's close. Oops.
Here are the top 10 reasons why the macro crowd has gotten it wrong on the bond market in 2014:
1. Blame it on the Weather - Anyone living east of the Mississippi knows that this past winter was brutal. And the bottom line is people don't spend a lot when they are holed up at home trying to stay warm. So...the U.S. economy hit a speed bump/soft patch during the wretched winter months.
2. China's #GrowthSlowing - If you've been paying attention at all, you know that China's economic growth rate is slowing (GDP growth has fallen from about 8% to 7.4%). The key is this is affecting global growth, which causes investors to stick with conservative stuff like bonds.
3. The Emerging Markets Currency Mini-Crisis - Frankly, you can't be blamed if you have forgotten about this one already. In short, if you blinked, you missed it as the purported crisis was over before it started. But if the word "crisis" hits the headlines enough, yields WILL fall.
4. Russia/Crimea/Ukraine - Ditto. Geopolitical tensions equal falling interest rates.
5. Deflation Worries in Japan - While this isn't exactly new, concerns about deflation in Japan remain a concern.
6. Deflation Worries in eurozone - Although the European debt crisis finally ended in 2013, the latest concern has to do with deflation. As such, hopes for new stimulus measures abound. And yes, this causes yields to fall.
7. More QE in Japan - Word is that Abenomics is getting ready for another round of QE. More bond buying means higher prices and lower yields.
8. The ECB To Join the QE Party - While "Super Mario" and friends have taken their sweet time, it looks as if the ECB is about to launch a QE program of their own. And what does this do to bond yields? Oh yea, that's right...
9. Janet Yellen Is Still Janet Yellen - Yes, the Fed is tapering. But at $10 billion a month, it's clearly a "taper lite." And in exchange for the taper of the Fed's QE, Janet Yellen let us know that she's still an uber-dove by extending the period of time before rates are expected to rise. And Ms. Yellen told investors that the "glide path" to higher rates will be VERY shallow.
10. China Stimulus - Don't look know, but the Chinese are starting to take stimulative measures. And while the PBoC isn't likely to launch any big plans, the weak economy means the central bank must remain supportive. And the key is that economic stimulus is ALWAYS good for bond prices.
So there you have it; yet another reason why we prefer to use rules and models to guide our investment decisions instead of effectively guessing as to what is going to happen next. While our approach isn't perfect (far from it!) and stumbles from time to time, it also keeps us out the BIG problems that can occur when you get a macro call dead wrong.
Will rates continue to fall? Will stocks succumb to the meaningful decline that everyone is looking for this year? Frankly, I have no idea. But I can say that we will be ready to take action when/if our models tell us that the odds favor the bears.
Publishing Note: I have an early meeting on Thursday and will not publish a morning missive.
Turning to This Morning...
PMI data out of China and Europe as well as the continued flow of earnings are in focus this morning. While the HSBC Flash PMI in China did uptick a bit in April, the key is that the indicator reading remains in the contraction zone. Across the pond, the flash PMIs improved in the eurozone for April. And we will get the data on the U.S. later this morning. Currently U.S. futures are pointing to a flattish open on Wall Street.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: +1.09%
- Hong Kong: -0.97%
- Shanghai: -0.28%
- London: -0.16%
- Germany: -0.32%
- France: -0.41%
- Italy: -0.48%
- Spain: +0.15%
Crude Oil Futures: -$0.13 to $101.62
Gold: +$6.30 at $1287.50
Dollar: higher against the yen and pound, lower vs. euro
10-Year Bond Yield: Currently trading lower at 2.709%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -1.20
- Dow Jones Industrial Average: +11
- NASDAQ Composite: -1.10
Thought For The Day...Keep in mind that not every person's opinion is worthy of your attention and/or consideration...
Positions in stocks mentioned: none