“Winning makes you different, and different scares people.”
- Tim Grover
Coming into the Olympics, what was consensus? With 4 Olympic and 19 World Championship Golds coming into Tokyo, Simon Biles winning big was at the top of the list. USA beating Canada in Women’s Soccer was consensus too.
Both consensus views were wrong. And it’s ok to write about it that way. Being wrong and/or losing happens a lot in real-life. Not everyone wants to be transparent and accountable as to why it happens. That’s your opportunity. Be better than that.
Unlike academic tests, “winning is a test with no correct answers.” “Winning knows all your secrets.” And, most importantly, unlike a lot of people in this world, “winning never lies.” (Winning, pg 23)
Back to the Global Macro Grind…
What’s consensus macro positioning?
A) Long of US Dollars
B) Buying/Covering Short-term US Treasuries
C) Short Natural Gas
Whether you knew that or not doesn’t matter. That’s what consensus (non-commercial) futures & options positioning was as of last week. We measure and map these in ROC (rate of change) terms religiously:
A) USD = net long +16,561 contracts = +2.44x on a 1-year z-score
B) 2yr Treasuries = net short position collapsed to only -54,347 contracts = +2.03x on a 1-year z-score
C) Nat Gas = -136,646 net short contracts = -2.09x on a 1-year z-score
Why use a 1-year z-score, or the number of standard deviations from the mean, for the position relative to itself? That’s easy: because it back-tests. Once something is plus or minus 2.0 on a 1-year look back, it’s time to consider fading the crowd.
I don’t always fade the crowd of Macro Tourists, but when I do, my Signaling Process and Quad Map gets me in The Game. The best setups happen when consensus gets long the wrong Quad.
If you were positioned for #Quad4 Deflation, you’d definitely buy US Dollars, buy/cover Short-term Treasuries, and short the most vile and hated in the Commodities complex of inflations!
But, when it’s not #Quad4 (and macro markets are Phase Transitioning from #Quad2 to #Quad3), you’d position like I did:
A) Short US Dollars from the top-end of my Risk Range™ Signal
B) Long Short-term Treasuries (SHY) from the low-end of my Risk Range™ Signal
C) Long Natural Gas (UNG) and related Equities (like RRC) from the low-end of my Risk Range™ Signal
To put these consensus positions in context of The Cycle, consensus never got Short Dollars & Long Commodities when we did.
Most people at the Fed didn’t realize we’d have +4-5% TRENDING headline inflation until the last 3 months, never mind going back to June of 2020 when we made this major Asset Allocation pivot.
In other words, consensus completely missed back to back to back #Quad2 quarters of US GROWTH and INFLATION #accelerating… then when they all called it “transitory” (going to #Quad4), they missed that INFLATION sticked!
You know sticked, as in Mary Lou Retton sticking the 1984 landing? Or Canada’s Jesse Fleming sticking that soccer ball in the back of Megan Rapinoe’s USA net, eh? #winning
But now, no worries, the consensus that completely missed being long of inflation is long deflation, having never been long inflation (Commodities) to begin with!
It’s not #Quad2 anymore anyway, so I expect consensus to be confused in the coming months and the Yield Curve to continue to flatten as #Quad3 Stagflation confuses both the Fed and the consensus positioning along the curve.
You saw that yesterday with the ROC (rate of change) of the US ISM #slowing to 59.5 for JUL vs. 60.6 in JUN. It’s subtle #slowing from Peak Cycle ISM reports, but it’s still real growth slowing as real world inflation sticks.
One of the most obvious US Equity Sector Style pivots we made coming into an Investable #Quad3 was going from short to long of Utilities (XLU) which were +0.8% yesterday to +5.1% already for #Quad3 in Q3 to-date.
We went from long to short both Financials (XLF) and Bank Stocks (KRE) vs. long Utes. That’s been a non-consensus #winning trade so far as well. We expect boring “Quality” Yields like Utes and REITS (XLRE) to continue to win for us as well.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.18-1.39% (bearish)
UST 2yr Yield 0.17-0.24% (bullish)
SPX 4 (bullish)
RUT 2183-2255 (bearish)
NASDAQ 14,550-14,895 (bullish)
Tech (XLK) 150.40-155.17 (bullish)
REITS (XLRE) 45.70-46.89 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 27,103-28067 (bearish)
VIX 16.08-20.64 (bearish)
USD 91.48-92.75 (bearish)
USD/YEN 109.00-110.13 (bearish)
Oil (WTI) 69.01-75.23 (bullish)
Nat Gas 3.81-4.16 (bullish)
Gold 1 (bullish)
Copper 4.30-4.66 (bullish)
Bitcoin 30,008-43,476 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
