“Opportunity had called, but in a troubled industry.”
- Captain Michael Abrashoff
That’s a quote that resonated with me, big time, from a book a subscriber sent me called It’s Your Ship – “Management Techniques From The Best Damn Ship In The Navy.” It’s not new (written in 2002). What Captain Abrashoff did to evolve the US Navy was:
“Our military had spent a lot of time and money on preparing for tomorrow’s battles with antiquated methods. We continued to invest in the latest technologies, but, as we all know, technology is nothing but a facilitator. The people operating the equipment are who give us a fighting edge.” (pages 1 and 2)
Indeed Captain, they do. The good news for those of you who have been on board the USS #HedgeyeNation is that we’ve prepared our ship for a Global #Quad4 Recession. The bad news is that there are MANY dogmatic Old Wall managers who have not.
Back to the Global Macro Grind…
Welcome to another Macro Monday @Hedgeye where we continue to build The Best Damn Process on Wall Street 2.0. We don’t wake up whining about the way the wind is blowing. We wake up, God willing, with two hands on the keyboard, measuring and mapping.
As is customary on this ship, let’s start with what the Global Currency market is signaling:
- US Dollar Index was up another +0.6% last week and up for the 6th week in the last 8 = our #1 Asset Allocation
- EUR/USD was down another -0.6% last week to -14.3% YTD and remains Bearish on both our TRADE and TREND durations
- Yen was down another -0.4% last week, crashing -20.7% YTD, and remains Bearish TRADE and TREND vs. USD as well
- GBP/USD resumed its #Quad4 Crash, down another -0.8% last week to -18.1% YTD as the BOE panics
- Argentina’s Peso was -1.5% vs. USD, crashing -15.2% in the last 3 months alone as #Quad4 ravages many EM economies
You get what that last part on Argentina means, right? As you can see on slide 48 of the Q4 Global Macro Themes deck, if the US economy slows like it did in 1 (and Powell wants to be Volcker), USD has a LONG way to go.
Whether you are an EM Country whose currency gets eviscerated (and the purchasing power of The People in those EM countries gets crushed) or something with a big INVERSE correlation to USD (like everything with beta), The Setup is flat out bearish.
What’s worse is having “outlier” events move things like Commodities in the short-term. Whether it was 2 MILLION barrels cut by OPEC or Putin being Putin, perpetuating a Stagflating #Quad4 is worse than an outright deflationary #Quad4!
- CRB Commodities Index reflated +6.5% last week moving to a Bullish TRADE, Bearish TREND setup
- Oil (WTI) reflated +16.5% last week to +13.5% in the last month (also Bullish TRADE and almost Bullish TREND)
- Copper disinflated -0.9% last week to -1.3% in the last month and remains Bearish TRADE and TREND
- Corn reflated another +0.9% last week taking its TRENDING 3-month return to +14.6% (Bullish TRADE and TREND)
- Cotton disinflated -1.3% last week to -17.1% in the last month and remains Bearish TRADE and TREND
Yes, we remain long of Corn, Wheat, and Grains in CORN, WEAT, and GRU terms this morning.
There are more than a few fundamental points to infer about what just happened in Commodities. The BIG stuff in our proprietary INFLATION Nowcast Model (like Oil and Food) is inflating, sequentially, while industrial/commercial demand stuff is still falling.
There is no OPEC for Copper. There is no Putin for Cotton. But winter is coming and there will be a problem with Energy/Food costs.
At least with a DEFLATIONARY #Quad4, the cost of living crashes alongside markets. No bueno with The Setup staring you in the face this morning. And if you think the CPI moving 20bps up/down changes that, you’re probably on a different process ship!
While those praying for a “pivot” have had it dead wrong, both the FX and Bond Markets have had this right:
A) UST 2yr Yield was up another +3 basis points last week to +88 basis points in the last month alone
B) UST 10yr Yield was up another +5 basis points last week to +62 basis points in the last month alone
C) HIKE Expectations rose by +0.50 MORE HIKES last week – that’s a new Cycle High for rate hike expectations
So what if the Fed did pivot? The Dollar would go down and Commodities and Cost of Living would ramp much higher. Oh, great, maybe you should run out and buy some Profitless Tech or a Moon Basket of Crypto on that.
Seriously, this is getting serious. Rates Sensitive Sectors that we got you out of (even though our Ship/Process Manual says you MIGHT buy them in a properly DEFLATIONARY #Quad4) are crashing alongside GROWTH, SMALL CAP, and HIGH BETA now too:
A) Utilities (XLU) were down another -2.7% last week taking their 1-month drawdown to an eye-watering -17.3%
B) REITS (XLRE) were down another -3.4% last week taking their 1-month drawdown to an eye-watering -18.1%
Got water in your eyes this morning? Good. That’s what those of us who wake up to reality do in the morning, splashing some water on our face! We don’t wakeup assuming that their Beloved Fed can smooth the seas or part the heavens.
We wake-up and do our job, measuring and mapping everything that’s measurable.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 3.64-3.92% (bullish)
UST 10yr Yield 3.56-4.02% (bullish)
UST 2yr Yield 4.02-4.36% (bullish)
High Yield (HYG) 69.90-73.21 (bearish)
SPX 3 (bearish)
NASDAQ 10,456-11,190 (bearish)
RUT 1 (bearish)
Tech (XLK) 117-128 (bearish)
Utilities (XLU) 63.16-68.13 (bearish)
Energy (XLE) 67.02-85.70 (bullish)
VIX 28.20-34.15 (bullish)
USD 110.06-114.56 (bullish)
EUR/USD 0.956-0.998 (bearish)
USD/YEN 143.47-145.79 (bullish)
GBP/USD 1.058-1.143 (bearish)
Oil (WTI) 75.98-93.36 (neutral)
Nat Gas 6.32-7.30 (bearish)
Gold 1 (bearish)
Copper 3.23-3.54 (bearish)
TSLA 211-254 (bearish)
Bitcoin 18,578-20,667 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
