Tightening Into A Slowdown

“The Irish are wild, feckless, and charming… or morose, repressed, and corrupt… but not especially civilized.”
- Thomas Cahill

Yep. It’s ok. I’m Irish. And to the establishment of linear Econs out there, I’m not considered especially civilized either.

If Goldman and Morgan Stanley want to cheer on “4 Fed Rate Hikes” and PE Powell wants to follow-through with even 1 or 2 of those into a 1H of 2022 economic slowdown, the barbarians of market volatility are going to show them humility in a hurry.

As Cahill reminded me in How The Irish Saved Civilization this weekend: “For, as the Roman Empire fell, as all through Europe matted, unwashed barbarians descended on the Roman cities, looting artifacts and burning books, the Irish, who were just learning how to read and write, took up the great labor of copying all of Western literature.”

Back to the Global Macro Grind…

I’m not here to save civilization. I’m here to try to help you save your hard earned money and compound Full Investing Cycle returns. The #1 way to do that is NOT have large drawdowns of your capital during #Quad4 economic slow-downs.

As a matter of risk management #process, let’s start the new week by measuring & mapping last week’s Global Macro market moves within the context of both my TRADE & TREND Signals and The Cycle (starting with FX first):

1. USD Index gave you a #Quad4 protection buying opportunity, correcting -0.6% week-over-week within its Bullish TREND
2. EUR/USD was +0.5% towards the top-end of my Risk Range and remains Bearish TREND @Hedgeye  
3. Japanese Yen had a Counter @Hedgeye TREND bounce of +1.2% and remains Bearish TRADE and TREND
4. GBP/USD appreciated another +0.6% as its recent Bearish to Bullish @Hedgeye TREND reversal was reiterated
5. Russia’s Ruble was down another -1.1% vs. USD to down -6.6% in the last 3 months and remains Bearish TREND

Think the Russell (IWM) can crash in #Quad4? Russia just did. Yep, it’s Hedgeye’s 1^st stock market #crash call of the new year with Russian stocks down another -3.3% this morning to -26% from where the Russian Cycle peaked in Q4 of 2021.

Like the USA, our current modal outcome (highest probability economic Quad) for Russia is:

A) #Quad4 in Q1 of 2022
B) #Quad4 in Q2 of 2022

So you’re still holding out for a #Quad1 in Q1 of the USA?

A) That’s not the highest probability Quad, and if you’re paying attention (daily) you already know that …
B) A Fed rate hike in March is pulling forward the deeper #Quad4 in Q2 risk anyway

Ex-Energy, where someone (big) always knows something (#DroneAttack), there was nowhere to run in US Equities last week:

A) With Rates Up, Financials (XLF) were DOWN -0.8%
B) Consumer Discretionary (XLY) was down -1.5% on the heels of US Retail Sales #SLOWING In December

That’s right. While the entirety of the quarter (Q4 of 2021) summed to a #Quad2 in Q4 #acceleration in both GROWTH and INFLATION, December saw sequential downticks in both US Consumption & Confidence.

Yes, I get the math on INFLATION. Last week’s Oil INFLATION cements that neither CPI nor PPI will slow in January:

A) CRB Commodities Index inflated +3.2% last week to new Cycle Highs
B) Oil (WTI) inflated another +6.2% last week to +18.9% in the last month alone

But that doesn’t mean that both Real Consumption GROWTH and Employment won’t #slow in JAN. Most of our predictive tracking algos are already delivering that #GrowthSlowing data. It shouldn’t surprise anyone given the sequential ramp in covid.

So, you’re going to have to wait for the Fed to see all of this (and the #divergence between CRB Raw Industrial Commodities vs. Oil, which were DOWN -0.1% last week to only +1.0% inflation in the last 3 months) on a lag. Because that’s what they do.

And deal with the blowup bearish US Equity Bubble market signals to continue to manifest in the meantime:

A) Both Russell 2000 (IWM) and NASDAQ Signaling Bearish @Hedgeye TREND now alongside Tech (XLK)…
B) Both Bitcoin and Ethereum continue to signal Bearish TRADE and TREND with lower-lows in play

Where will rates stop going up? I don’t know. But the higher the short-end (2yr UST Yield 1.03% this morning) goes, from here… And the more real US GROWTH slows… the faster the Yield Curve is going to compress.

Stocks (SPY) won’t like that. SPY is teetering on its 1^st @Hedgeye TREND Signal breakdown in 18 months. There’s no irony in that. When the Fed tightens into a #Quad4 Slowdown (see my Q4 2018 call for details), it gets uglier, faster; whether I’m Irish or not.

Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:

UST 10yr Yield 1.61-1.84% (bullish)
UST 2yr Yield 0.79-1.05% (bullish)
SPX 4 (neutral)
NASDAQ 14,527-15,563 (bearish)
RUT 2120-2241 (bearish)
Tech (XLK) 160.95-170.24 (bearish)
Consumer Staples (XLP) 76.25-77.90 (bullish)
VIX 16.64-22.92 (neutral)
USD 94.55-96.76 (bullish)
EUR/USD 1.124-1.147 (bearish)
USD/YEN 113.76-116.44 (bullish)
GBP/USD 1.349-1.376 (bullish)
Oil (WTI) 77.16-85.64 (bullish)
Gold 1 (bullish)
Copper 4.28-4.57 (neutral)
Bitcoin 39,106-46,903 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer