“This cultural conflict between English and Celts not only continued in British North America, it shaped the history of the United States.”
- Grady McWhiney, PhD
If you didn’t know that certain Irish types didn’t respect the British Establishment for centuries prior to the founding of this great country, now you know. Did you know that on this day in 1776, Rhode Island became the 1st American colony to renounce allegiance to King George III?
Never mind kissing the rings of unelected kings and queens. Many still worship elected politicians like gods. And, on this day in 2022, all of your eyes will be on an unelected part of the US Government called The Federal Reserve.
No, I don’t respect either the Fed’s premise or their process. Many of you do. And that’s totally fine with me. That said, the economy you live in and the markets they’ve backstopped have never been more hostage to their incompetence in forecasting the future.
Back to the Global Macro Grind…
I spent 4 straight hours on Institutional Client calls yesterday. Yes, I’m Irish-Canadian. And yes, whether they like the revolutionary in me or not, many of the world’s largest Institutional Investors (pension funds, mutual funds, hedge funds, etc.) pay me to hear about our forecasts.
Unlike the Fed’s forecasts, ours are generally accurate. When it comes to calling for ROC (rate of change) pivots on the economic sine curve’s of GROWTH, INFLATION, and PROFITS in the last 15 years, I don’t have to “brag” to remind people of our #Quad4 “calling” score.
Remember the time, on this day in 2021, when the Fed said #Quad2 #InflationAccelerating was “transitory”? lol
Your life is hopefully healthy and long, but Wall Street memories can be very short. When it comes to Growth, Inflation, and Policy Cycles mine is not. What happened historically (i.e. the Base Effects) is the foundation of our GIP (Growth, Inflation, Policy) Model and The Quads.
While it may seem like forever ago, our “call” in early January was very straightforward:
- 100% of the time that the Fed tightens into a #Quad4, markets crash
- #Quad4 in Q2 of 2022 was going to be priced into markets slowly, then all at once
There is no change to that economic or market view this morning:
A) The Yen has crashed vs. Core Asset Allocation to the US Dollar in #Quad4
B) The Russell 2000 and NASDAQ have crashed -22.2% and -21.6% from their #Quad2 Cycle Peaks in NOV 2021
C) Bitcoin, Crypto, NFTs have all crashed anywhere between -40% and -90% (or more?)
When I told the hope.com guy (The MSTR Maestro, Mike Saylor) that “no matter what you believe, the market believes #Quad4 economic conditions are going to be a major risk to Bitcoin”, Saylor told me “no, your models will be destroyed.”
Update on #Quad4 MSTR Equity destruction: MSTR has crashed -60% (from $859) from its #Quad2 Cycle Peak on NOV 9th, 2021.
You see the problem is one of arrogance (certainty) and Macro Unawareness. If you are operating and talking about the present with an inaccurate view of the future, other than trying to sell me something, what are you actually doing?
What a far more credible and broad Global Macro Market is telling you is that The Fed has us in The F-Bucket!
“But, KM, what if he says this tomorrow and markets do that? Why isn’t it the right thing to do, fighting inflation? Why can’t I buy anything right now and make any money?”
These are some frequently asked questions on my Institutional Client calls. I certainly don’t have the answer to all of them. I have my current market positioning. That’s far more important than my “convictions” and/or how to predict what’s in Powell’s Lawyer/Linear Econ mind.
What’s The F-Bucket? Well, we’re calling what you’re in right now the same thing (The Fed Bucket):
A) Investable Bucket of Equity Volatility = VIX under 20
B) The Chop Bucket of Equity Volatility = VIX 20-30
C) The Fed’s F-Bucket of Equity Volatility = VIX 30-90
If you can show me a money manager who consistently makes money in A) #Quad4 when B) Equity Vol is in the F-Bucket, I have a lot of respect for them. If they also make money in the other 2 Buckets of Vol when we’re in Quads 1, 2, or 3, all the more Irish respect!
I’m not short SPY because both my #VASP (Volatility Adjusted Signaling Process) and #Quad4 Back-tests say that QQQ and IWM (Russell) are better shorts. Why? SPY has big things like Utes, Staples, Pharma, etc. that win (on a relative basis) in #Quad4, but can still lose you money!
Unless the Fed can get the Russell and/or NASDAQ out of the F-Bucket, I really don’t care what they say about the future today:
A) #RussVol (front-month Russell 2000 Volatility) closed at 34 yesterday with a Risk Range™ of 30-40
B) #NazVol (front-month NASDAQ Volatility) closed at 36 yesterday with a Risk Range™ of 32-41
You’ll note that a TRENDING 30-40 VIX is where Levered Long Perma Bulls of GROWTH and/or Crypto returns go to die. Volatility in the 40-90 range is where the Levered Long crowd goes to retire and/or HODL under their high water-marks for life.
I’ve always thought the establishment’s blind belief in The Fed would end in a way that economic and market gravity ultimately predicted. For a long time (and many times) now they turn-tailed dovish and delayed The Gravity getting them.
At this particular time in human history however, hope.com isn’t going save them from this epic Policy Mistake.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 2.80-3.08% (bullish)
UST 10yr Yield 2.79-3.03% (bullish)
UST 2yr Yield 2.47-2.82% (bullish)
High Yield (HYG) 77.78-79.93 (bearish)
SPX 4055-4270 (bearish)
NASDAQ 12,103-12,812 (bearish)
RUT 1 (bearish)
Tech (XLK) 137-148 (bearish)
Utilities (XLU) 69.55-76.16 (bullish)
VIX 24.90-37.37 (bullish)
USD 100.95-104.75 (bullish)
Oil (WTI) 97.19-106.99 (bullish)
Gold 1 (bullish)
Copper 4.20-4.56 (bearish)
Bitcoin 37,008-40,892 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
