“Information cascades may not be so important a problem.”
- Robert Shiller
Great counterpoint to your daily fear-mongering-ad-rev-click-bait there by my man Bob Shiller. It’s one of the concluding quotes in his most recent book that many of you have studied alongside me: Narrative Economics.
Simple risk management and decision-making #process question for you: when you wake up every market morning, do you start with numbers or other people’s narratives?
If Old Wall media started with the Global Macro market numbers, they’d call this morning The Anti-Contagion.
Back to the Global Macro Grind…
To be crystal clear, I have no idea what non-linear and interconnected risks are going to appear in my predictive tracking algos and/or Risk Range signaling process in the next 6 hours (Fed meeting, eh), never mind 6 weeks, or months.
That said, I have a high degree of confidence that mostly everyone else doesn’t either!
Having been the only Independent Research firm that went bearish on China at both the end of 2017 and beginning of 2020, I’m comfortable being uncomfortable about not knowing “why.” When matters more than why. Timing matters.
I didn’t have to tell myself other people’s stories to go bearish on US stocks as contagion risks manifested in 2008 either.
One proprietary model we run in real-time is called our Systemic Contagion Risk Tracker (if you’d like to subscribe to that, it’s part of my Macro Partner, Josh Steiner’s, Financials Pro research product). Here’s the update on that:
- The Ted Spread widened 1 bps d/d to 10 bps as of 09/20, up 1 bps (+16.8%) from four weeks ago
- The Euribor-OIS Spread remains in negative territory since the beginning of August 20'
- The CDOR-OIS Spread widened 1 bps to 26 bps as of 09/20, up 2 bps (+6.4%) from four weeks ago
- High Yield widened 16 bps d/d to 2.90% as of 09/20, down -17 bps (-5.5%) from four weeks ago
- The Chinese Interbank Rate tightened 11 bps d/d to 2.11% as of 09/20, down 4 bps (-1.7%) from four weeks ago
Yeah, I know. That’s what you heard on CNBC for the last two days.
In all seriousness, this is a serious business and your hard earned wealth deserves a better way than the click-bait-macro—tourist-act that has become the Wall Street Journo profession.
Unlike trying to get you to click on our “stuff”, much of our risk tracker focuses on overnight interbank lending spreads. The reason for this is those spreads reflect systemic risk perceptions and reality.
When those spreads are low (tight) the perceived risk is low and when they're high (wide) risk is rising. The normal state for these spreads is to be low (tight) and that's the case >99% of the time.
Aside from the interbank market, we also consider stress gauges in the high yield and leveraged loan markets, important gauges of risk in the corporate credit market.
Individual name CDS signals issuer-specific risk and can also be viewed in the context of the broader group, i.e. U.S. Financial issuers. Sovereign CDS reflects the perceived default risk of the respective countries.
All the while, we overlay our TRADE/TREND/TAIL risk management signals with our Systemic Contagion Tracker:
1. The US Bond Market
A) Didn’t flinch (bond yields would break-down, hard, if contagion was coming to America)
B) High Yield OAS Spread is DOWN to +276bps over Treasuries this morning = no contagion
C) If anything, higher-lows in the UST 10yr Yield with it > TREND support of 1.30% is incrementally bullish
2. The Global Equity Market
A) Chinese Stocks (Shanghai Comp) closed UP +0.4% overnight and are now signaling BULLISH TREND! Ha
B) India (big place where you might see some contagion) made a new Cycle High, +7.2% in the last month
C) Russia (a stock market that goes straight down during deflation contagions) is also +6.7% in the last month
3. The Global Commodity Market
A) Oil is inflating another +1.5% this AM and remains Bullish TREND with Oil Volatility signaling Anti Contagion
B) Cocoa, Palm Oil, Oats, OJ, etc. are ripping (again) this morning (and will have zero mentions at Zero Edge)
C) Gold did nothing during said “contagion” after breaking bad back to Bearish TREND in the last week
Ok, you got me. I did a little Mucker Narrative thing there (I’ve been known to tell a few ice fishing stories in my day!) by including Gold in my Commodity Signals (shh, it’s really a Currency that trades with Real Rates).
So why aren’t you reading about Gold and Utilities (XLU) breaking down to Bearish TREND Signals as the probability of a Real Growth #Acceleration in the USA in Q4 (vs. the Real Growth Q3 slowdown) rises? I guess you just did.
Those are Anti-Contagion Signals inasmuch as everything else in this quantified, no-conflict-of-interest-or-ad-driven-clickbait, independent research content is.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.27-1.40% (bullish)
UST 2yr Yield 0.21-0.26% (bullish)
SPX 4 (bullish)
RUT 2171-2267 (neutral)
NASDAQ 14,666-15,402 (bullish)
REITS (XLRE) 46.03-48.06 (bullish)
Tech (XLK) 151.80-159.95 (bullish)
Utilities (XLU) 64.07-67.98 (bearish)
Energy (XLE) 46.25-51.89 (bullish)
Shanghai Comp 3 (neutral)
DAX 15,141-15,926 (bullish)
VIX 15.52-25.99 (bearish)
USD 92.13-93.39 (bearish)
EUR/USD 1.171-1.187 (bullish)
USD/YEN 109.10-110.21 (bearish)
Oil (WTI) 68.52-73.63 (bullish)
Nat Gas 4.66-5.57 (bullish)
Gold 1 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
