“The way you approach this unusual opportunity exposes you to noise.”
- Daniel Kahneman
If you could listen in on my Institutional Client calls, you might be surprised to hear what people are focused on into and out of headline news events. Especially for those who manage Fixed Income funds and/or trade rates, this Fed appointment seemed to matter.
While I kept telling clients that “it doesn’t matter much to me, the Cycle does”… that didn’t mean that people weren’t putting on what we call big “event driven” bets. And whoever bet on Brainard equating to Dovish Down Yields just got run over.
This is why I rarely do event-driven trades. Especially if I have ZERO legal edge on the event, why would I gamble like that? My odds of making money are much higher when I stay with Full Investing Cycle TRENDS like rising bond yields in #Quad2.
Back to the Global Macro Grind…
Now I know why the biggest consensus “bet” in Global Macro (a +2.73x 1yr z-score futures & options bet) was to “buy Gold”:
A) IF the illegal “edge” was supposed to be that Brainard was going to win…
B) THEN bond yields would fall and Gold would continue to rise
That’s as simple as an IF/THEN equation gets in macro. If you had the Brainard part right, that is…
So now it’s right back to what I do (The Cycle) and what short-term Treasury Yields do when:
A) The US economy is #accelerating in #Quad2… and
B) The Fed is expected to catch up to #accelerating Labor Growth and INFLATION on their usual lag
I’m ok with naming names with a good guy like Mike Wilson because I knew he’d come around to our #Quad2 views as the data did (his latest note says “consumers are opening their wallets”… which means #Quad2 Consumption #accelerating)…
But I won’t name names on who imploded a large amount of Fixed Income capital during the initial #Quad2 breakout in bond yields.
You don’t need names. You can obviously see it in both Treasury Bond Volatility (i.e. The MOVE Index) and these recent ramps in the short-end of the Yield Curve where the “bets” were just flat out wrong:
A) UST 2yr Yield went from +0.20% as the #Quad3 in Q3 real GDP GROWTH slowdown was ending in September 2021… to
B) +0.50% by late October ahead of the #Quad2 (October!) Labor, Retail Sales, and Industrial Production #accelerations
Then to +0.63% in a New York minute yesterday on the Powell “news.”
For those of you who don’t trade rates, these are some of the biggest short-term, back-to-back % gains in the UST 2yr Yield, ever. Why? Because yields are coming off their most asymmetrically-low-levels, ever…
And the “big guys” who trade rates use a LOT of leverage on these rates bets.
Now some of these guys and gals know what The Signals & The Quads are, but they obviously don’t always agree on my positioning vs. theirs. That’s what makes The Game my passion. In the end, only one side of the trade wins.
Since something like 2yr UST Yields ONLY BREAKOUT in #Quad2, this one was a relatively easy one for me to position for. Trying to understand why I was getting run over with my Gold short, not so much… until I had time, space, and more market information.
What’s next? Well now that the short-end of the curve is signaling immediate-term TRADE #overbought, so is the US Dollar vs. the Euro. Oil is down towards the low-end of my Risk Range because it has the highest short-term macro inverse-correlation to USD right now…
“But, but…” there’s another big “event-driven” bet on Oil and “Biden’s SPR release speech”… so I have to deal with that noise now too.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.50-1.67% (bullish)
UST 2yr Yield 0.47-0.65% (bullish)
SPX 4 (bullish)
NASDAQ 15,611-16,192 (bullish)
RUT 2 (bullish)
Financials (XLF) 38.95-40.61 (bullish)
VIX 15.35-19.91 (bearish)
USD 94.12-96.61 (bullish)
EUR/USD 1.121-1.150 (bearish)
Oil (WTI) 75.13-83.94 (bullish)
Gold 1 (neutral)
Bitcoin 55,007-69,505 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
