What's The Next Narrative They'll Chase?

“We become just by doing just actions, brave by doing brave actions.”

-Aristotle

I don’t love Aristotle, but I do like that doers quote. Ryan Holiday uses it in another excellent book I read over Thanksgiving break called Courage Is Calling – Fortune Favors The Brave.

I don’t consider what we do here at Hedgeye courageous. I simply consider it the right thing to do. Principles matter more to me than a brokered commission or click-bait-ad-revs. If I wanted to generate either, I would have.

Marcus Aurelius called the following 4 principles the “touchstones of goodness”: Courage, Temperance, Justice, and Wisdom. Is there justice being served by Putin or Xi this morning? How about these Crypto Frauds? Especially in Old Wall media, wisdom remains in short-supply and the courage of the few to call out liars and criminals remains the opportunity of The People.

Back to the Global Macro Grind…

Good morning to The People of China, Russia, and America this morning. Top of the risk management morning to all of you wherever you are elsewhere too! No matter where that is, here we are. It’s Macro Monday at Hedgeye!

With the “Buy China Re-opening” narrative a little off this morning, let’s just go back to reality and start with what Global Macro Markets continue to signal inasmuch as the data does (Global #Quad4 Recession in Demand):

1. US Dollar Index corrected -0.9% last week to +10.8% for #Quad4 in 2022 YTD and remains Bullish TREND
2. EUR/USD was +0.7% last week and is a good example of a Counter @Hedgeye TRADE (bullish) vs TREND Bearish
3. Yen was +0.8% last week vs. USD and is also Bullish TRADE, Bearish TREND (we stay with The Cycle’s TREND)
4. Canadian Dollar was flat 0.0% vs. USD last week and remains Bearish on both our TRADE and TREND durations
5. Argentina’s Peso was -1.6% vs. USD last week, crashing -17.8% in the last 3 months = Bearish TRADE and TREND
6. China’s Yuan was -0.7% vs. USD last week to -4.4% in the last 3 months and remains Bearish TRADE and TREND

While buying every damn dip in the US Dollar vs. Euros and Yens got too easy by the 10^th month of Hedgeye being Long USD vs. Short EUR and JPY, November was what it was. #Tougher. And when the going gets tough, the tough get going.

What’s going on in the Euro and Yen is unwinding massive (liquid) flow trades that every chart monkey and CTA in the world was chasing by end of October. What’s going on in China, Argentina, and Canada this morning is a Global #Quad4 Recession.

For those that didn’t know that both Oil and Commodities Crash during a #Quad4 Recession, see the back half of 2008 for details. We made that Full Investing Cycle call too. Here’s how Commodities did last week:

1. CRB Commodities Index was down another -1.1% last week taking its 3-month TREND to -7.8%
2. Oil (WTI) continued to crash, down another -4.8% last week taking its 3-month TREND to -15.9%
3. Gold was flat last week after breaking out to Bullish TRADE and TREND, +5.8% in the last month

So “why” is it that Gold does well when #Quad4 manifests properly (i.e. INFLATION #slows from its economic Cycle Peak)?

A) It’s not a Commodity – it’s a Currency (ask people in Argentina or China who are long of it)
B) It trades inversely with Real Rates (as Global Demand slows faster, longer-term bond yields go down)

That last part on Bond Yields gets real interesting, from here:

A) Short-end (i.e. Fed Policy) is barely moving this morning with UST 2yr Yield = 4.44% post a -8 basis point week
B) Long-end (i.e. Economic Gravity) is moving faster, to the downside, post UST 10yr Yield dropping -15 bps last week

This whole gravity thing is, of course, well understood by the Yield Curve which is at a bone-chilling CYCLE LOW of -78 basis points on 10s minus 2s this morning. That’s -40 basis points MORE INVERTED in the last month!

What’s more inverted or perverted:

A) Putin imposing his personal will against all of Europe this winter… or
B) Xi re-opening militarily ON what he considers “his” people?

Or the next Old Wall Narrative on why the largest ground war in modern European history and a potential Chinese Revolution is a signal to “BUY STAHKS!”???

Seriously, this is getting more serious now.

On US STAHKS, the Sector Style moves last week really jumped out on REALLY LOW VOLUME:

A) Utilities (XLU) led last week with a +3.0% move and moving from Bearish to Neutral @Hedgeye TREND
B) Basic Materials (XLB) were +3.0% as well last week on “China Re-Opening” trades? Really?

Since I am long of some Precious Metals (Silver was +2.0% for us last week, for example), I get some of the excitement in certain types of Basic Materials (we’re long of PPLT, GDX, etc. too)…

And I get the Down Bond Yields, Up Utes (XLU) trade (I’m just not in that Old #Quad4 Classic, yet…). But seriously? Chasing Industrials (XLI) or Elon’s exposure to that and China (TSLA is a Top 2 component of our XLY Short)? No thanks.

What’s the next narrative (that isn’t supported by any numbers) they’ll chase?

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

UST 10yr Yield 3.62-3.99% (bullish)
UST 2yr Yield 4.31-4.63% (bullish)
High Yield (HYG) 72.75-75.31 (bearish)        
SPX 3 (bearish)
NASDAQ 10,801-11,390 (bearish)
RUT 1 (bearish)
Tech (XLK) 125-135 (bearish)
Consumer Staples (XLP) 72.43-77.11 (bullish)
Healthcare (XLV) 132-138 (bullish)                                 `              
Shanghai Comp 3051-3133 (bearish)
DAX 13,821-14,599 (bearish)
VIX 19.73-26.03 (bullish)
USD 105.16-110.42 (bullish)
EUR/USD 1.004-1.047 (bearish)
USD/YEN 137.33-143.07 (bullish)
GBP/USD 1.141-1.215 (bearish)
CAD/USD 0.732-0.755 (bearish)
Oil (WTI) 73.71-84.30 (bearish)
Gold 1 (bullish)
Copper 3.47-3.85 (bearish)
TSLA 163-197 (bearish)
Bitcoin 15,456-17,290 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer