“Think of the road to crisis as a valley with steep walls.”
-Peter Turchin
The Old Wall “year-to-date” narratives are in crisis with their clients this morning. Both the broad Russell 2000 Index and the Equal Weight SP500 are both DOWN YTD with the Russell (IWM) in a -14.9% DRAWDOWN since AUG 1, 2023.
What Core Asset Allocation decisions did you make from AUG 1 to Q4 of 2023? Either your family or your investors are going to want to know if your risk management #process was dynamic and objectively assessing visible risks.
I’m old enough to remember Q4 of 2018 when my #VASP (Volatility Adjusted Signaling Process) signaled to go from BULLISH on US Growth, Equities, etc. (since 2016) to BEARISH. That was one of the best #Quad4 pivots in Hedgeye’s long history.
Back to the Global Macro Grind…
What does the 1st VIX Breakout above 20 since Q4 of 2018 signal? A: LOTS.
Before I get into LOTS of immediate-to-intermediate-term TRADE and TREND signals, let’s give some air-time to those of you who are, like me, longer-term Full Cycle Investors, who didn’t chase lower-highs in July of 2023.
Today’s quote from Peter Turchin is from chapter 8 of End Times called “Histories Of The Near Future”:
“Anyone watching the events of the past decade from afar – a space alien, say, or a future historian – will no doubt be impressed by how thoroughly the humans inhabiting the most powerful nation on earth have managed to screw up their society. Despite remarkable scientific progress and extraordinary technological change… the well being of most Americans has been declining.” -pg. 191
Do we really need Powell to provide more cowbell and $100-150 Oil for The American People when:
A) US “Difficulty Paying For Usual Household Expenses” is breaking out alongside the VIX to 6-month highs?
B) “401k Hardship Withdrawal Rate” (Fidelity data) is hitting an all-time high?
Perversely, since one of my Core Asset Allocations is Long Oil and Energy Stocks (XLE, XOP, PSCE), I’d take that…
But The People won’t be able to. And that’s why The Fed is losing control of The Bond Market.
While there’s probably close to a 0% chance that CNBC is going to focus on the “YTD Return of the Russell” (or SPX Equal Weight, RSP) today, there’s also close to a 0% chance they focus on the typical 60/40 Asset Allocations that are getting killed.
The Bond Market Crash of 2023 happened. And It’s still happening with the following #VASP Signals refreshed:
A) #BHLs (big higher-lows) for both the UST 2yr and 10yr Yields in my Risk Range™ Signals
B) High Yield OAS spread BREAKOUT SIGNAL being a Similar Set with The VIX
‘But, but… KM, you can’t really see it in Credit yet…’ -July 2023 Institutional Client Call commentary
KM: when you “see” it next, it’s going to happen slowly then all at once.
And that’s precisely what RISK does in major Asset Classes. While Old Wall “charts” types keep trying to call things “oversold” and/or in “panic” (after none of them called for the DRAWDOWNS to begin with)…
Markets crash from “oversold” levels.
In addition to these non-sensical frequentist “calls” about getting long “seasonality” and/or “presidential cycles” (McFly, have you seen who the 2 candidates are going to be this Cycle?), the biggest thing Old Wall Perma Bulls get wrong is:
A) WHEN my #VASP signals breakout from a Volatility (or Risk) perspective ahead of …
B) A Phase Transition in the economic QUAD
Markets DISCOUNT future economic slowdowns VERY quickly. From a MONTHLY QUAD perspective, this is what we see:
A) USA going from #Quad2 (essentially now) to #Quad3 heading into the holidays… with
B) DEC 2023 = #Quad3, JAN 2024 = #Quad4, FEB 2024 = #Quad4, MAR 2024 = #Quad3, APR 2024 = #Quad3
As opposed to being a “Frequentist” (“hey, bro, this has happened X % of the time since… therefore”), we utilize what’s called a Bayesian Inference #process, modelling everything stochastically for incoming data…
Example: Oil just inflated +36% since June… so our evolved Dynamic MONTHLY QUAD system adjusts our Real PCE Nowcasts for that in real-time. It doesn’t care about “seasonal” veggies or JFK’s Presidential Cycle.
In conclusion, what I’d say to Turchin about how the “End Times” start to end faster is this: think of the road to another macro market crisis as a 6-month valley of #Quad3s and #Quad4s as we officially enter a US Recession.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.76-5.13% (bullish)
UST 10yr Yield 4.61-5.01% (bullish)
UST 2yr Yield 4.98-5.25% (bullish)
High Yield (HYG) 71.50-73.02 (bearish)
SPX 4 (bearish)
NASDAQ 13,059-13,496 (bearish)
RUT 1 (bearish)
Tech (XLK) 164-171 (bearish)
Energy (XLE) 86.30-92.97 (bullish)
Utilities (XLU) 56.58-60.35 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 30,909-32,712 (bullish)
BSE Sensex (India) 65,360-66,770 (bullish)
DAX 14,860-15,398 (bearish)
VIX 16.42-22.30 (bullish)
USD 105.40-106.95 (bullish)
EUR/USD 1.048-1.063 (bearish)
USD/YEN 148.15-150.58 (bullish)
GBP/USD 1.205-1.232 (bearish)
Oil (WTI) 83.18-91.47 (bullish)
Oil (Brent) 84.86-94.30 (bullish)
Nat Gas 2.83-3.54 (bullish)
Gold 1 (bullish)
Copper 3.51-3.67 (bearish)
Silver 21.24-23.55 (neutral)
MSFT 319-335 (bearish)
AAPL 172-180 (bearish)
AMZN 125-132 (bearish)
META 309-329 (bullish)
GOOGL 135-141 (bullish)
TSLA 214-247 (bearish)
NVDA 410-450 (bearish)
Bitcoin 26,004-29,985 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
