“We use the term risk all too casually, and the term uncertainty all too rarely.”
- John Bogle
That’s a great quote coming from one of the all-time greats. What would the original disruptor of “actively managed” funds (and creator of the 1st Index fund) know about risk management?
Hint: it starts with always embracing uncertainty.
And, from my perspective, it’s executed on in real-time, by having the humility to know that A) I don’t know WHEN my #Quad4 TAIL Risk Signals are going to break but B) when they do… I execute accordingly.
Back to the Global Macro Grind…
Welcome to another Macro Monday @Hedgeye where the message from The Machine remains that if the Fed wants to tighten into a slowdown, then my TRADE, TREND, and TAIL risk signals are going to light up my screens faster than most can get out.
Who gets you out?
We all know that it won’t be The Saylor (MSTR) at Hope.com or anyone who is permanently bullish of either an Investing Style or an Asset Class. What keeps you in The Game, from here, is understanding where to pivot during back-to-back #Quad4s.
As usual, let’s start with the Global Currency market where having “Raised Cash” on time made a big difference last week:
- US Dollar Index was +0.5% for the home team last week, helping preserve and protect your hard earned capital
- EUR/USD was -0.6% last week and remains Bearish TRADE and TREND with the ECB sounding nothing like The Fed
- Japanese Yen was +0.5% vs. USD and is now Bullish TRADE but Bearish TREND
- GBP/USD was -0.9% last week, breaking @Hedgeye TRADE support and moving to Neutral TREND this morning
- Russian Ruble was down another -1.6% vs. USD to down -4.8% in the last month and remains Bearish TAIL
What is TAIL Risk?
I don’t use those two words together casually. In fact, there’s only one-way to use them and that’s mathematically. When a Country’s Quad Nowcast is #Quad4 for back-to-back quarters like Russia’s is and my TAIL Risk Signals break, risk is on, big time.
As I explained in this morning’s Top 3 Things (note to Institutional Subscribers that goes out at 6AM ET):
- #QUAD4 – the 3 nastiest #Quad4 Countries to be long of Equity Risk remain Russia (stocks crashing another -6.2% today to -32% since OCT), South Korea (KOSPI down another -1.5% overnight to -15.5% from Cycle Peak), and USA (NASDAQ and Russell -14.3% and -18.6%, respectively, from their #Quad2 Cycle Peaks)
As I also explained last week, the probability of a TAIL Risk Event (i.e. stock market crashes) was rising alongside the aforementioned TRENDING volatility breakouts in both the Russell and NASDAQ:
A) #RussVol (RVX) closed the week in the Bad-Word-Volatility Bucket at 36.25
B) #NazVol (VXN) closed the week in the Bad-Word-Volatility Bucket at 34.06
And front-month SP500 Volatility is now signaling that the probability is rising for a VIX breakout > 30. Will the new puffer fish Fed perpetuate a TRENDING breakout in VIX? The Machine is daring them to play that game of chicken with markets.
The Fed, of course, doesn’t know it’s going to be a deepening #Quad4 come Q2 inasmuch as they had no idea that INFLATION was going to breakout like we nowcasted at this time last year.
That’s not my problem. It’s both theirs and whoever invests alongside their outlook.
Here’s how The Machine scored #Quad4 in US Equity Sector Style terms last week:
A) Consumer Discretionary down -8.2% on the week to -8.3% in the last month = Bearish TREND and TAIL
B) US Tech (XLK) down -6.9% on the week and -9.1% in the last month = Bearish TREND and TAIL
C) Utilities (XLU) down only -0.8% on the week to -0.8% in the last month = Bullish TREND
D) Consumer Staples (XLP) down -1.4% on the week to +1.8% in the last month = Bullish TREND
Yep. Long Staples & Utes vs. Short Discretionary & Tech is how Long/Short managers express #Quad4.
What wasn’t uniformly #Quad4 in price last week was Commodities. That doesn’t mean they won’t be in #Quad4 alongside everything else by the time the Fed raises rates a few times:
A) Oil (WTI) remains the #1 reason for that and there are obviously unique reasons for that (Russia, Drone Strikes, etc.)
B) Natural Gas deflated another -6.2% last week taking its Full Cycle Commodity Crash to -38% this morning
C) Gold, which isn’t a Commodity (it’s a currency), was up +0.8% for us and remains Bullish TRADE and TREND
Then, of course, there’s the mother of all bubbles and crashes in what I’ve always called Commodities: Crypto. Bitcoin was down another -15% last week taking its #Quad4 crash to -25% in the last month alone (pre this morning’s meltdown).
It’s a good thing the Fed and all of their fans have zero accountability in perpetuating the free-money handouts that helped balloon these bubbles into the biggest we’ve seen since 1999.
And no, you didn’t need some kind of a deep US recession to implode those bubbles in 2000. You just needed the Fed to invert the curve into a #Quad4 US economic and profit slowdown.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.65-1.87% (bullish)
UST 2yr Yield 0.85-1.10% (bullish)
SPX 4 (bearish)
NASDAQ 13,601-15,025 (bearish)
RUT 1 (bearish)
Tech (XLK) 152-166 (bearish)
Consumer Staples (XLP) 75.33-77.45 (bullish)
Utilities (XLU) 68.03-70.38 (bullish)
VIX 19.91-30.34 (bullish)
USD 94.70-96.42 (bullish)
EUR/USD 1.126-1.147 (bearish)
USD/YEN 113.29-115.33 (bullish)
GBP/USD 1.351-1.371 (neutral)
Oil (WTI) 78.60-87.84 (bullish)
Nat Gas 3.45-4.44 (bearish)
Gold 1 (bullish)
Bitcoin 31,218-41,397 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
